Current Legal Issues Affecting Central Banks, Volume V
Chapter

Chapter 17 International Law of Bank Secrecy

Author(s):
Robert Effros
Published Date:
May 1998
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Author(s)
PHILIP R. WOOD1

Introduction

In civilized societies, the privacy of individuals is a fundamental policy. So also is the protection of the individual. As always, these policies of private freedom and public submission are not easy to balance.

Special secrecy codes apply to those people to whom individuals must of necessity disclose their private affairs—priests, doctors, accountants, and lawyers. These custodians of confidentiality would not be able to minister their aid if they did not guarantee the secrecy trust confided in them. The secrecy codes are sometimes extended to those people who handle private assets—stockbrokers and banks. To the extent appropriate, the privileges benefit corporations.

Nearly all countries with developed legal systems respect bank secrecy. The differences between the countries are of degree rather than substance. There is little divergence on the rule that a bank may not disclose information on its customers to other private persons. However, there is significant divergence on the degree to which banks must disclose such information to government authorities.

The main debate, therefore, centers on the extent to which the country should have direct access to information kept by banks about its citizens or the citizens of another country. However, this is not by any means the only debate.

Banks traditionally respect the confidence reposed in them as a matter of sound business policy. The law of bank secrecy is primarily concerned with compulsory disclosure. Deliberate intrusion by others receives less protection, but is controlled to some degree in some countries, for example, by (i) the tort or delict of wrongful invasion of privacy (for example, excessive intrusion by journalists) and (ii) controls on wire-tapping and other surveillance. The right to inspect and check the accuracy of personal data kept by credit data bureaus is a separate topic and is covered in many countries by specific legislation designed to protect the individual against secret files containing wrong facts.

The objective of this chapter is to attempt a summary description of international attitudes on bank secrecy and disclosure, and to indicate some of the policies that may have influenced the divergent attitudes of jurisdictions. This chapter does not make recommendations, because countries will have different policy objectives; however, it does provide information about the international experience.

Motives for Bank Secrecy

Banks are the custodians of the people’s means of exchange. It is now virtually impossible to carry out financial dealings otherwise than through the intermediary of banks. The use of banks is a necessity. Banks are therefore the repositories of immense information about their customers. Some of the customers will be good, some average, and some bad. Knowledge is power. Apart from this, there are many motives behind the desire for privacy.

In the case of individuals, there is often a general desire to maintain the privacy of one’s own economic dealings. Wealthier individuals may desire not to disclose wealth to children, spouses, family, or heirs, and wish not to attract the attention of thieves and rogues.

Businesses may wish to protect themselves from competitors and will seek to keep confidential information regarding pricing, future plans and strategies, inventions (until protected by patents), and their financial condition.

Some “flight capital” is money transferred abroad to protect it from political and economic storms, for example, expropriations, over-restrictive exchange controls, excessive taxation, discriminatory takings, and runaway inflation. Switzerland has historically offered a safe refuge against foreign tumult in such cases, involving the Huguenots during one century and the Nazis in another. Other flight capital seeks a hidden refuge from mere ordinary taxation and exchange controls. Bank secrecy may be abused by corrupt persons seeking to conceal the proceeds of their wrongdoing.

Apart from the upholding of the law, legislatures seek to balance several interests in their banking policy. First, some desire to encourage savings in banks, domestic or foreign, and, therefore, consider that secrecy must be guaranteed. Countries that have nationalized banks may particularly emphasize the secrecy duty in order to counter fears of leakages of information to the country as owner. Second, some legislatures desire to preserve the banking system—which rests on confidence and reputation—from the taint and the odor of impropriety. The banking system could be jeopardized if the public loses trust in its integrity. For this reason, among others, bank licensing systems commonly require high standards of management integrity and compliance with the law. Sometimes the transparency needed to combat fraud, and thereby to foster public confidence, may conflict with the privacy needed to foster that same public confidence.

Compulsory Disclosure Overriding Bank Secrecy

The main reasons for piercing the veil of secrecy include:

  • the prevention of serious crime (fraud, theft, bribery, and drugs);

  • the prevention of evasion of economic law (exchange control, trade and customs, and antitrust laws);

  • corporate disclosure and transparent securities markets (audited accounts, prospectus disclosure, false markets, and insider trading);

  • corporate governance (inspections);

  • the supervision of banks by regulatory authorities;

  • the supervision of securities dealers and investment advisers;

  • civil litigation (discovery of evidence and pre- and postjudgment attachments); and

  • insolvency (collection of assets, director liability, fraudulent preferences, and wrongdoing).

Other miscellaneous exceptions are listed in this chapter.

International Collisions

The generally accepted international view is that a country cannot enforce its national laws on the territory of another country without the consent of the latter. Hence, a country cannot carry out a police or tax investigation, compulsorily interview a witness, search premises, serve a summons, arrest an accused, or order the production of documents on the territory of another country, unless the latter has consented, for example, by its own statute or by a treaty. There are many erosions of this principle in national practice.

International “collisions” on bank secrecy result from:

  • different views about the ambit of jurisdictional sovereignty;

  • differences of opinion as to the interests that should be protected, for example, individual against country, private against public, tolerance of some fraud in the interests of some other higher public objective, liberal against stringent regulation, intensity of economic laws (exchange control, customs, or antitrust laws), or encouraging the public to use the banking system;

  • differences springing from inertia in the legal system: some countries are more preoccupied with survival against hunger and with the dread of anarchy than sophisticated laws dealing with bank disclosure;

  • differences of opinion as to the extent to which banks should be involved in law enforcement; and

  • an indulgent attitude by some countries toward flight capital escaping extremely adverse local conditions: some countries consider it reasonable to provide a banking haven against foreign oppression, economic anarchy, or gross mismanagement.

The dismantling of exchange controls in many countries has exacerbated free flows of funds out of some countries and, in particular, weakened the ability of tax authorities to prevent leakages.

Distinctions should be made among the following areas:

  • serious foreign crimes. (Cooperation is extensive because countries agree on serious criminal conduct and have a mutual interest. Traditional barriers based on national sovereignty are being rapidly dismantled.)

  • regulation of “public interest” enterprises, such as banks, investment firms, insurers, and securities firms. (Cooperation is widening quickly.)

  • the prevention of tax evasion. (Cooperation is controversial in many countries.)

  • economic laws. (Cooperation has traditionally been quite limited in this case; for example, exchange control, antitrust—competition, monopolies, restrictive trade practices—customs, rationing, import or export control laws.)

  • private civil litigation. (Cooperation is patchy but expanding in the case of civil fraud and tracing claims.)

Because of the emphasis on country consent to mutual assistance, there is an increasing proliferation of treaties that seek by consensus to avoid confrontations. There is also a significant measure of harmonization of laws in this field that reduces the risk of collision, notably in the case of bank supervision and money laundering. These trends are documented later in this chapter.

European Union: An International Effort

The European Union (EU) is notable for measures taken to pierce banking secrecy at the international level. There are at least two reasons for this. First, the concept of a single international market requires a harmonized secrecy and disclosure duty for financial transactions. Second, because only one authorization is required to trade in any of the member states, the “single passport,” bank secrecy needs to be synchronized, and regulatory authorities need to be able to exchange information. This practice is stretched to include exchanges of tax information. Not all member states wholly share the view that information should be freely exchanged for bank supervision purposes. Austria, Greece, Luxembourg, and Portugal have tight secrecy laws compared to other member states. Bank secrecy is only one of the areas where the idea of the unitary country conflicts with autonomy.

Classification of Jurisdictions

A classification of jurisdictions is unsafe because, among other things, detailed data are difficult to collect and then evaluate accurately, and countries may be lax in one area of disclosure but not another so that a weighting has to be applied, which is bound to be subjective. Nevertheless, one may very tentatively classify the jurisdictions as follows:

Low SecrecyUnited States
Medium SecrecyAustralia, Britain, Canada, Ireland, Italy, Japan, Jersey, numerous other Commonwealth countries including India, Malaysia, and Singapore, and the Scandinavian countries
Quite High SecrecyDenmark, France, and Germany
High SecrecyAustria, Greece, Liechtenstein, Luxembourg, Portugal, and Switzerland (some cantons only)

Special tax haven jurisdictions (for example, those in the Caribbean and Pacific) are excluded from this list. The author has not investigated most South American countries. Many African countries probably have basic legal regimes based more or less on those of former imperial powers, although divergence is becoming increasingly pronounced. Perhaps some countries in the Middle East (for example, Egypt, Kuwait, Lebanon, and the United Arab Emirates) might have been influenced by French ideas because their codes are Napoleonic based. It is not easy to ascertain trends in the new legislation in Central and Eastern Europe, Russia, the other countries of the former Soviet Union, or in emerging countries in Asia, because legislative development is rapid.

Generally, most of the world’s 300-plus jurisdictions can be put into seven or eight groups, insofar as their financial law is concerned.2 Apart from the Romans, the main suppliers of commercial and financial law to the world have been: England, France, Germany, the Netherlands, Switzerland, and the United States, probably in that order. The inheritance of law may facilitate a grouping of basic approaches, for example, in relation to the criminalization of bank secrecy or disclosure in civil litigation. However, bank secrecy is vitally affected by national economic policies and by the take-up of multilateral and bilateral treaties. In these areas, national laws are influenced more by particular local policies than by the norms of a received legal system.

Sources of Law for Scope of the Secrecy Duty

Sources of Law

The basic duty of secrecy is contained in case law, codes, or special statutes. The method of writing down the law is immaterial; what the law says is much more important. In some countries (for example, Germany, Japan, and the Netherlands), the law is contained in general contract terms. These are unusual in common law countries, but in those having standard-form, industrywide general conditions, there has been a recent proliferation of banking codes of good conduct promoted by bank associations, among which is that of the United Kingdom.3 Special confidentiality contracts, for example, in relation to project finance deals (important to project sponsors), are used to provide bank secrecy. These are contracts between participating banks, the project sponsors, and the project company. They cover the credit documents and information acquired by participating banks in connection with the credit. Typical express exceptions allow disclosure in the case of (i) consent; (ii) bank officers, employees, and advisers who need to know; (iii) grant of participations; (iv) public domain (otherwise than by breach of the duty); (v) compulsion, for example, in the case of supervisory request or court orders; (vi) event of default and bank enforcement; (vii) securities regulation; and (viii) audit. These confidentiality clauses are an interesting mirror of secrecy statutes. Many such contracts require the bank to notify the customer of disclosure requests from the authorities (if permitted) and to give the customer the maximum opportunity to object.

Non-legally-binding guidelines or codes of practice (so-called soft laws) approved by bank associations are another source.4 New Zealand has a voluntary Code of Banking Practice, which was originally published in 1992 by the New Zealand Bankers’ Association.5 This code adopts the Tournier rules about confidentiality.6

The final source of law on the duty of secrecy is ultrasoft administrative law, that is, unofficial policies set by club consensus and encouraged by bank regulatory authorities, especially to control crime. A decreasing number of countries prefer the “soft law” option to hard “black-letter” statutory regulation.

Relevance of Categorization

The importance of categorizing, whether the duty of secrecy springs from contract, tort (delict), or domestic statute, affects issues regarding the governing law and how it is ascertained, if there is no express choice; judicial jurisdiction; remedies; provability of damage claims for breach of the secrecy duty in insolvency proceedings; the rights of the citizen, for example, if the statute is constitutional or falls within the province of administrative law; and various technical matters, such as interest on damages, security for costs, and limitation of actions (prescription).

In practice, problems on these points seem to be few. Where the duty is contractual, liability is usually strict, the contract must be performed, and there is no question of having to prove negligence.

English-Based Jurisdictions and Implied Contractual Terms

In a large number of countries with English-based legislation—of which there are at least 80 jurisdictions—secrecy is a term of the contract implied by custom. The foundation case is Tournier v. National Provincial and Union Bank of England.7 Mr. Tournier had no fixed address, so he gave his bankers the address of his employers. He defaulted on a bank loan of £10. The bank told his employers and informed them that Tournier was betting heavily. The employers sacked him. The court held that banks are under a duty of confidentiality. The Court of Appeal defined the duty and its exceptions, namely disclosure in the case of (i) compulsion of law; (ii) duty to the public to disclose; (iii) required in the interests of the bank; and (iv) express or implied consent of the customer. This case is the basis of the law, among other countries, in Australia, the nine Canadian common law provinces (in Quebec there is thought to be a similar customary rule), Hong Kong, Ireland, New Zealand, and Pakistan (codified in 1974 for Pakistan nationalized banks). The laws of a few of these are noted below.

In the United States, the scope of the secrecy duty varies from country to country, but resort to the principles in Tournier appears common. In Peterson v. Idaho First National Bank,8 a bank told the customer’s employer that the checks of the customer had been returned for insufficient funds. The court held that the bank was in breach of an implied contract of secrecy. In Milohnich v. First National Bank of Miami Springs,9 the bank disclosed to third parties the amount the customer had on account. The third parties used the information to obtain court orders to freeze the account. It was held that the bank had a duty of secrecy.

Implied Contractual Terms in Other Jurisdictions

Numerous other jurisdictions share the English view that bank secrecy is an implied contractual term arising from custom and not needing express mention. This view prevails in Belgium, Germany (the majority opinion), Italy, Japan, the Netherlands, Spain, and Sweden. In none of these jurisdiction is there an express statute on bank secrecy. In several of them, there is much theorizing as to whether the duty might sometime arise in the law of tort or delict.

Penal Code Provisions in Some Napoleonic Jurisdictions

Nearly 80 jurisdictions either directly borrowed the original French codes or were influenced by them. The latest country to borrow France’s codes is the United Arab Emirates in the 1990s, probably through the examples of Egypt and Kuwait.

Article 378 of the 1810 French Penal Code imposed criminal sanctions on persons such as physicians and “all other persons who are in possession, by virtue of their … profession … of secrets confided to them” who reveal those secrets.10 Because there was doubt in France as to whether this criminal sanction applied to banks or whether the duty was merely civil and customary, it is not surprising that receiving countries should go either way on this issue. Thus, this provision has been held to apply to banks in Luxembourg11 but not in Belgium. In France, the position was clarified by a statute in 198412 so that doubts about the application of the Penal Code to banks were put to rest. A breach of the secrecy duty was expressly criminalized.

Codification of Implied Terms

In many countries, bank secrecy is codified. New codifications are common in central and eastern European countries and the Asian republics of the former Soviet Union, for example, Kazakhstan, which do not feel safe in assuming a customary rule. For example, in the Czech Republic the duty is contained in Section 38 of the Banking Act.13 Breach is noncriminal but gives rise to claim for damages and, no doubt, possible sanctions by the central bank. There are the usual exceptions in favor of (i) the bank supervisory authorities, (ii) court orders for the purposes of civil law proceedings, (iii) an authority engaged in criminal proceedings under the conditions stipulated by the Criminal Proceedings Act, (iv) a tax authority for the purpose of tax proceedings to which the client is a party, and (v) the Ministry of Finance when carrying out supervision.14 A bank shall report on matters that are subject to confidentiality only to the persons entrusted with the supervision of banking operations. The exchange of information between the Czech central bank and supervisory banking bodies and similar institutions in other countries shall not be regarded as a violation of confidentiality if it concerns information on entities operating or intending to operate on the territory of the respective country. Article 48 of Poland’s Bank Law also codifies the rule and its exceptions.

In Denmark, the duty is codified in the Code on Banks and Savings Banks of 1991 (originating in 1974). There are similar codifications in Finland (Deposit Banks Act, 1991) and Norway (1961, 1988) but not Sweden. Examples of common law countries that have codified the Tournier rules are Singapore15 and the Bahamas.16 In Mexico, bank secrecy was codified in the Credit Institutions Law of 1990.17 A similar provision applies to trusts.

Pakistan is an example of a country that reinforced bank secrecy with a view to promoting confidence in the banking system and attracting foreign private investment and foreign exchange into the country. The Protection of Economic Reforms Act, 1992, provides that the secrecy of “bona fide banking transactions” shall be strictly observed by all banks and financial institutions. Moreover, there is a special provision that the banks must maintain complete secrecy in respect of transactions in foreign currency accounts.18 No penalties are prescribed by the Act. The degree to which this legislation overrides the usual exceptions is a matter of debate.

In Portugal, the bank secrecy provisions in Decree Law No. 2/78 were introduced on January 9, 1978, following the notorious listing in a newspaper of details of individuals’ bank account details after a coup d’état.19 The law was primarily intended to reestablish confidence in the banking system. Consequently, Portugal is a country that has a high degree of bank secrecy that is subject to EC directives, such as the money-laundering directive.20 Although disclosure for the purpose of providing criminal testimony can ultimately be ordered by a court, there appears to be no exception for compulsory disclosure to the tax authorities. Bank secrecy cannot be compulsorily overridden by mandatory testimony in civil proceedings.21

In Russia, the duty is codified in Article 26 of the Federal Law No. 17-FZ of February 3, 1996. A breach attracts damages. There are exceptions covering court orders, tax authorities, crime authorities, bank supervisory authorities, executors of estates, auditors, and the like.

In South Korea, the Real Name Financial Transaction Law in general provides for the protection of secrecy by financial institutions.22 This law does not mention credit transactions, but, nevertheless, it is thought that these are covered in any event by a customary contractual duty.

In Switzerland, the duty was codified in 1934 mainly to assist flight capital from Nazi Germany. Article 47 of the Federal Law on Banks and Savings Banks criminalizes both negligent and intentional breaches of bank secrecy.23 The section applies also to breaches committed abroad by Swiss bank employees. There is a corresponding provision protecting manufacturing or business secrets in Article 273 of the Swiss Penal Code.24 In Switzerland, numbered accounts are used, but in all cases someone in the bank knows the true account holder. The object is to strengthen secrecy by reducing the number of bank employees who know the identity of the account holder.

Constitutional Provisions

A number of countries trace bank secrecy back to provisions in their constitutions, which, for example, protect the privacy of citizens25 or guarantee the individual’s right to an uninhibited development of his personality.26 It appears unusual that bank secrecy is actually constitutionally entrenched, and the discussion of the constitutional basis appears to be often no more than an indication of a parallel desire to protect individual freedom by entrenching privacy against the country.

Where bank secrecy has indeed been elevated to an issue of constitutional significance, the effect may be that a higher parliamentary majority is required to change the law and that violations are justiciable before a constitutional court set up to protect the constitution. An example is Section 38 of the Austrian Banking Act of 1993.

However, there have been decisions in a number of jurisdictions where, for example, search and seizure powers by the tax authorities have been held not to be unconstitutional.27

Scope of the Bank Secrecy Duty

The propositions set out below about the scope of the bank secrecy duty appear to be universal in commercially developed countries.

Customers

The duty only applies to customers. However, the duty usually applies to information disclosed by a potential customer during prospective negotiations, although the customer does not in the event become a customer. This is true in England and Germany.

Third Parties

If a bank acquires information about a third party from a customer, the bank owes the secrecy duty to its customer, not the third party. This principle probably applies in countries following the Tournier rules,28 as well as in Austria.

Information

The duty applies to specific details, for example, credit balances, loans, security, and transactions. Disclosure of information that does not enable the customer to be identified is exempt, for example, general disclosures in financial statements or prospectuses for securities issues. Mere disclosure of a business relationship may be a breach of the duty, for example, if the result is that the customer’s deposits are attached. Disclosure that a bank does or does not have an account for a customer is a breach in Germany. Casual information acquired outside the banking relationship, for example, on the golf course or in social gatherings, should be treated cautiously.

Duration

The duty continues after the account is closed according to Tournier.29 This rule appears to be universal.

Banks

The duty applies to all credit institutions that have deposit accounts with customers. Therefore, it will typically apply to other financial institutions, such as building societies and savings cooperatives. Codifications often so provide.

The duty usually applies to local branches of foreign banks because they are within the relevant jurisdiction. In Switzerland, Article 2 of the Federal Law on Banks and Savings Banks of 1934 so provides.30 Conversely, foreign branches are subject to the secrecy rules of the countries in which they reside, not those of the country of the head office. The national secrecy rule is not extraterritorial. Thus, Switzerland does not apply its secrecy laws to foreign branches of Swiss banks. The extent to which the country of the head office can enforce its disclosure policies in relation to branches and subsidiaries abroad is reviewed further in this chapter.

Banks are liable for the defaults of their officers and employees in the course of their duties on general principles of law. Furthermore, the duty usually applies to those who necessarily have access to bank information, for example, external lawyers, accountants, consultants, insolvency administrators, and the like. The Swiss Banking Act has been amended so as specifically to extend the duty to “mandatories.”31 Often these external agents are bound by their own secrecy codes, for example, the duty of confidentiality that a lawyer owes to a client.

National Branches and Affiliates

In England, information may not be disclosed to affiliates in the same group, for example, a parent or other subsidiaries.32 This has implications for management control of the group; marketing leakages to nonbank affiliates (for example, insurance, investment, and travel businesses); and disclosure to credit card companies in the group.

There are compromise solutions. In Denmark and Finland, the sharing of information in a banking group is statutorily permitted, subject to controls. However, in Luxembourg a 1981 law permits credit establishments to communicate certain restricted information of a general nature to controlling shareholders.33 In addition, in Singapore an exception to the secrecy obligation contained in Section 47 of the Banking Act provides that the branch of a foreign bank can provide information to its head office relating solely to credit facilities granted to a customer.34 However, in Switzerland the veil of incorporation is not lifted.

Checks

There is much divergence with regard to checks. In the United States, it has been held that a check is not a confidential communication but rather a public negotiable instrument that has been knowingly set “afloat on a sea of strangers.”35 Evidently, there is no privacy as regards bank statements in connection with checking accounts, even where a client has attempted to immunize his business transactions from discovery by the device of a lawyer’s commercial checking account.36

Other countries take a more restrictive view. For example, in Germany if a check is not honored, the holder can ask the relevant bank for information on the drawer, such as the name and address of the drawer, which the bank is entitled to provide in order to enable the check claim to be processed. The bank may not give additional information about the drawer’s financial situation. The bank can also inform the drawer about the payee and the circumstances of payment.

The position in France is at the opposite end of the scale from that in the United States. An example is the decision of the Court of First Instance of Paris in which a drawer of a check requested his bank to send him a copy of both sides of the check and the name of the payee bank.37 The bank sent its customer only a photocopy of the first side of the check, that is, the part the customer had executed. It was held that the bank was entitled to refuse delivery of the reverse side of the check.

In Greece, if a check is not payable for lack of funds, the bank must report the matter to the public prosecutor for prosecution of the issuer.38 This is also the position in the United Arab Emirates, and it may well be common elsewhere.

Funds Transfers

The transfer of funds from one account to another inevitably involves disclosure to the participating banks and to any transmitting agency. Check rules could be applied by analogy as appropriate. In the United States, the Financial Crimes Enforcement Network of the Department of the Treasury and the Board of Governors of the Federal Reserve System issued a regulation requiring financial institutions to collect and retain certain information pertaining to wire transfers of $3,000 or more.39

Conflicting Duties

The secrecy duty may be in conflict with the law of misrepresentation or fiduciary duties, as where the bank advises a customer on a transaction with another customer or is banker to both companies in a takeover. In such a situation, if the bank is in the position of a fiduciary, it may have a divided loyalty. In Kabwand Pty. Ltd. v. National Australia Bank Ltd.,40 a bank advised a customer purchasing another customer’s business but did not disclose that the target business was unprofitable and was heavily indebted to the bank. It was held that the secrecy duty overrode a statutory duty not to engage in misleading or deceptive conduct, under Section 52 of the Trade Practices Act (Commonwealth), 1974. However, in Smith v. Commonwealth Bank of Australia,41 it was held that a bank that was banker to both seller and buyer of a business could not advise the buyer because the secrecy duty owed to the seller constituted a conflict of interest.

In similar circumstances, an English court would probably not find a conflict on the ground that customers dealing with large banks must expect that the counterparty may also be a customer and that the bank will owe a secrecy duty to the counterparty. In Kelly v. Cooper,42 an estate agent acted for sellers of two contiguous properties sold to Ross Perot who wanted one big property. If the second seller had known that fact, he would have held out for a higher price. The court held that the estate agent had a duty of confidence to the first seller, and said duty prevented the agent from disclosing such information to the second seller. The court noted that the second seller should be expected to know that estate agents will often act for owners of comparable property, and it was therefore an implied term that the agent must honor a secrecy duty to those other owners.

In a Canadian case, the bank was held liable for a conflict of interest. In Standard Investments Ltd. v. Canadian Imperial Bank of Commerce,43 a corporation revealed to a bank their plans to take over a trust company. The trust company was also a customer of the bank, and the bank had recently purchased for its own account a 10 percent stake in the trust company to help prevent a takeover attempt. Subsequently, the bank gave advice to the corporation. The court held that reliance by the corporation on the bank gave rise to a fiduciary relationship, which required the bank to disclose any conflict of interest. The bank was liable for damages for failure either to disclose the conflict or to have refused to advise.

In the United States, several cases have held that a bank is not precluded from financing a hostile takeover of one of its customers, although it is possible that the bank should not use confidential information about the target customer in order to decide whether or not to finance the takeover.44

A Chinese wall that would segregate confidential information within a bank may prevent conflicts; however, the efficacy of Chinese walls is outside the scope of this chapter.

Guarantees

Another case of potential difficulty arises when a bank is taking a guarantee. The question is whether the bank must disclose the country of the customer’s account to the prospective guarantor. Normally, a bank can (and often must) remain silent because there is no duty to disclose, but this duty has been eroded in extreme cases. A risk is that the bank usually says something, in which event any omission may be misrepresentation; a half-truth is as good as a lie. A bank must not conceal from the guarantor facts that are required to render comprehensive answers to the guarantor’s questions.45 A positive misrepresentation will always be actionable. The bank should obtain the customer’s consent (which may be implied). The question has been much litigated in Australia.46 In Finland, a guarantor is entitled to information about the credit. In New Zealand, the courts have decided that a bank must disclose to a guarantor facts about the debtor’s being guaranteed that are unusual or are different from those that the guarantor might naturally expect. There is English case law to the same effect.

If a customer requests the guarantor to give a guarantee, and the guarantor pays the guarantee, the guarantor should be entitled to information about the customer to enable the guarantor to recover indemnity. This may be the case whenever a third party is a successor to a claim by operation of law—in this case, subrogation. This has been so held in Austria.47

Customer Remedies and Sanctions

The customer remedies may be civil, criminal, and/or administrative.

Civil Remedies

Civil remedies include, for example, damages for breach of contract or tort.48 Punitive damages would be unusual in jurisdictions based on the English legal system, except perhaps in a very extreme case. The English courts do not favor criminalizing civil awards by treble damages and the like. Actual damage may be difficult to prove. Punitive damages are not available in Germany.

Injunctions are usually available for threatened breaches, for example, in common law countries and Germany. There are no criminal sanctions in Belgium, as Article 458 of the Criminal Code, which criminalizes breaches of the secrecy duty for doctors and the like, has been held not to apply to banks.49 The duty is regarded not as one of secrecy but of “discretion.” Nor are there criminal sanctions in the Czech Republic, Germany, Italy, Japan,50 Poland, Spain, or Sweden. The same is probably true in the Netherlands.51

Criminal Remedies

In some countries, bank secrecy is criminalized. There may be various reasons for this: because secrecy is elevated as a fundamental legal and moral policy; because civil damages are often an inadequate remedy, in that loss is difficult to prove in many cases; because banks have been nationalized, and it is desired to underline the principle that this will not lead to disclosure to the state as owner; and sometimes perhaps because secrecy is desired to defeat foreign extraterritorial demands for disclosure. Criminalization is unusual in common law countries, except for tax haven jurisdictions. Usually, the injured customer also has the civil remedies of damages and injunction, but further investigation would be required to establish the extent to which the criminal sanction excludes civil remedies.

In the following countries, breaches of the duty are criminal: Austria,52 the Bahamas,53 the Cayman Islands,54 Finland,55 France,56 Greece,57 Luxembourg,58 Malta,59 Mexico,60 Singapore,61 South Korea,62 and Switzerland.63 Note that many developed countries, while not criminalizing ordinary breaches, may criminalize breaches by government employees (for example, under banking or official secrets legislation, as in Belgium and Germany) in relation to the bank regulatory authorities. Countries differ according to whether only individual employees may be visited with criminal sanctions or whether the bank itself may be penalized.

Administrative Remedies

Theoretically, if a bank breaches the duty of secrecy habitually, bank regulatory authorities may intervene, by virtue of their general powers, to revoke its authorization on grounds of mismanagement.

Governing Law

Where the duty is contractual—as in most jurisdictions based on the English legal system—the extent of the duty is a matter for the governing law of the contract, in accordance with the usual principles of international law, subject to an overriding statute. The governing law of bank deposit accounts generally is not expressly chosen and is often the law of the jurisdiction where the bank branch owing the account is located. In Europe, reference should be made to the 1980 Rome Convention on the Law Applicable to Contractual Obligations.64

Disclosure Generally

There are so many exceptions to the duty of secrecy that in England the duty has been described as a duty to disclose.65 However, there are great differences in approach for the reasons previously stated. The main exceptions in legally developed countries are addressed subsequently. A miscellany of general matters is first mentioned.

Blocking Statutes

Some countries have adopted blocking statutes whereby the authorities can order a domestic citizen or business not to produce information to foreign authorities. The most important of these were directed against U.S. extraterritorial jurisdiction, mainly in the antitrust field, and some are limited to maritime transport, following U.S. antitrust measures in the shipping trade in the 1960s. The following countries are among those having blocking statutes of varying scope: Australia (1976-81); Belgium (1969-79) (ships and aircraft); Canada (1947-80); Denmark (1967) (ships); Finland (1968) (ships); France (1968-81); Germany (1965-66) (ships); Italy (1980) (ships); the Netherlands (1956); New Zealand (1980); Norway (1967) (ships); the Philippines (1980); South Africa (1978); Sweden (1966) (ships); and the United Kingdom (1980).

International Conflicts

In view of the divergent international attitudes toward bank secrecy, there are bound to be international conflicts between courts. Typically, the head office or parent of a bank in one jurisdiction is legally obliged to disclose information held by its foreign branch or subsidiary, which is legally obliged not to disclose by the foreign law applying where the branch or subsidiary is located. Many of the cases have involved the extraterritorial jurisdiction of U.S. law and courts. The U.S. courts have sometimes permitted a “good faith” defense if the U.S. bank acted in good faith by endeavoring to comply with the U.S. order for disclosure by its foreign branch or subsidiary but is frustrated because disclosure would involve a violation of foreign law.66

Fishing Expeditions

A fishing expedition is an attempt, either by the authorities investigating an offense or irregularity or by private litigants, to obtain evidence to establish their case or to ferret out evidence by general enquiries for information pursuant to statutory or court discovery rules. Such an attempt could be a request for all documents that relate to a particular breach or might disclose a breach; or all accounts and correspondence of a specific customer or all customers of a particular class. Numerous countries tend to limit fishing expeditions using the following methods:

  • by insisting that proceedings have started so that the disclosure is subject to judicial control and the dispute and the defendant are specifically identified. (However, the commencement of proceedings of some sort can be a tipoff to criminals. Hence a requirement that criminal proceedings have already been initiated is often construed liberally—as in Austria—to cover preliminary pretrial investigative proceedings by a court so that police enquires can be favored.);67

  • by requiring a well-defined and corroborated suspicion in advance

  • by requiring that the disclosed matters must be shown to be strictly relevant to the case;

  • by requiring specific disclosure requests, that is, prohibiting general requests for all information and documents relating to a customer. (There must be specific evidence that the bank has the document, not just a suspicion.); and

  • by excluding information showing other civil causes of action or other crimes accidentally obtained in the course of an investigation.

The position depends on the issue and the jurisdiction. The objection to fishing expeditions is noticeable in most developed countries. The U.S. Federal Rules of Civil Procedure permit discovery of anything that “appears reasonably calculated to lead to the discovery of admissible evidence.”68

Insulation of Authorities

Disclosure rules in favor of the authorities often prescribe that the receiving authorities may not divulge the information to other departments of state; for example, bank supervisors may not disclose such information to the tax authorities. This insulation, or firewall, is no doubt a genuflection in the direction of bank secrecy enhancing public confidence in banks. However, there are many examples of derogations from this view. Free disclosure of potential serious crimes to the criminal authorities is a near universal exception.

Disclosure Limited by Functions

Generally, authorities who are permitted to pierce bank secrecy may only do so for the purposes of their functions, such as supervision. Debate may center upon whether the ambit of the specified functions is to be construed widely or narrowly.

Official Secrets

Authorities receiving information are generally subject to duties of secrecy on the lines of those applicable to public officials. Breaches are usually a criminal offense.

Disclosure with Customer Consent

A bank may disclose information if the customer consents. The benefit of the duty is a privilege of the customer who may waive it, for example, in connection with public announcements of a completed syndication by a tombstone advertisement. The consent may be implied. Singapore is exceptional (but not alone) in requiring a written consent.69

However, in Luxembourg, where violation of bank secrecy is criminalized, the view is that a victim may generally not waive his protection under criminal law. It therefore follows that in Luxembourg, if the customer expressly authorizes the bank to give information to third parties, the bank is authorized to provide the information but it is not obliged to do so.70 Professional secrecy is a duty of the bank, but also a right of the bank.

Some of the main areas of difficulty with consent are credit references, central credit reference agencies, loan sales, securitizations, and outsourcing of bank functions. Each of these is analyzed subsequently.

Credit References

Banks commonly give credit references about their customers at the request of other banks, for example, when a customer is applying for credit. This practice, if kept within bounds, is generally considered to be beneficial to customers. Usually, banks only give the information in general terms (for example, a general statement about creditworthiness does not detail information about the country of the account or transactions) and only give the information to approved enquirers (usually other banks). Many countries draw a distinction between credit references about commercial customers (which are given without specific consent, subject to limits) and credit references about individuals (which often require consent).

In England and the United States, a negligent credit reference is usually actionable, subject to any effective exclusion of liability.71 There are numerous similar decisions in other jurisdictions. Banks in England commonly give references without express consent on each occasion, on the basis that consent is usually implied. Australia has a Code of Conduct issued under the Privacy Act, 1988, relating to consumers (not corporations).72 In Canada, the Canadian Bankers’ Association has a voluntary Model Privacy Code for Individual Customers of 1990,73 influenced by the Guidelines on the Protection of Privacy and Transborder Flows of Personal Data74 prepared by the Organization for Economic Cooperation and Development. Canadian banks often seek consent if a consumer is involved.

In Austria, there is a statutory exemption for generally phrased information on the financial situation of a business (not specific details) as usually given by banks, unless the client expressly objects to it.75 Banks use standard formulations. In Denmark, there are rules on the release of credit reports.76 Consent is required for private customers. The rules require that the credit report be issued in general terms. Moreover, the bank must be satisfied that the applicant has a business interest in obtaining the information. In France, credit information is given apparently on the basis that the bank secrecy rule is not contravened if the information is general and nonspecific.

In Germany, the terms on which banks may give references are generally governed by the general terms of business, which are in standard form for all commercial banks.77 The usual provision is that banks can give information about certain commercial customers without express consent on each occasion but not about personal customers. Generally, the request for information must be routed through a bank and is limited to basic information about the customer, for example, information available on the public business file together with a statement of creditworthiness.

In Japan, banks give credit references to other banks without specific consent. The New Zealand Code of Banking Practice (which is nonstatutory) insists that bankers’ references must not be given without the customer’s consent.78 In Norway, the Act on Savings Banks of 1961 permits the board of directors of a bank—there is a high degree of formality—to give information on behalf of the bank to another bank without being subject to secrecy.79 Other credit institutions governed by secrecy law and credit institutions abroad are probably included. This exception will allow the transfer of intragroup information and will also allow one bank to advise another about the creditworthiness of a customer.

In Pakistan, the exchange of credit information between banks on a confidential basis is specifically recognized in banking legislation.80 In Singapore, an exception to the secrecy duty in Section 47 of the Banking Act permits the disclosure of information required to assess the creditworthiness of a customer with regard to a bona fide commercial transaction so long as the information is general.81 In South Korea, confidential information can be disclosed to other financial institutions by virtue of the Real Name Financial Transaction Law in order to permit information exchanges about creditworthiness.82

Credit Reference Bureaus

Credit reference bureaus are established primarily to protect credit providers from habitual defaulters. They are private blacklists. For example, all banks in Germany also belong to a special scheme, called by its acronym SCHUFA. It is a nonpublic credit reference agency for private customers. Disclosure of information requires the customer’s appropriate consent. Hungary set up its Interbank Debtor and Borrower Information System in 1996. It is available only to banks. In the Netherlands, most banks and various other institutions are members of the BKR, which is a credit bureau for private individuals. Members supply information on credits granted to private persons, and a record of defaults is maintained. Members must supply the BKR with information and must also consult the BKR database before granting credit to a private person. The banks consider that there is no breach of confidentiality because only banks or other financial institutions can become members, and all members are obliged to keep BKR information secret. Data protection legislation in various countries gives individuals the right to inspect credit reference entries and insist on corrections.

Other Cases

Some other cases of disclosure with implied customer consent are the following:

  • Loan Sales. Permission for assignments and participations in the original credit agreement should be an implied consent to loan sales and participations.

  • Securitization of Loans. The sale of a loan to a specially formed vehicle involves disclosure to the buying vehicle and, potentially, to investors. Bank secrecy can be a serious hindrance to these schemes.

  • Outsourcing. Where a bank arranges for some of its functions (for example, computer systems, credit card administration, data processing, and the like) to be performed by external parties, it may not always be a simple matter to find a disclosure gateway.

  • Miscellaneous. There may be other special situations where consent is implied. In Lee Gleeson Pty. Ltd. v. Sterling Estates Pty. Ltd.,83 a customer authorized his bank to confirm to a builder that the customer had sufficient money to pay the builder if the builder expedited the work. The customer subsequently countermanded payment instructions to pay the builder, but the bank did not tell the builder. It was held that the customer had implied consent to the disclosure of the countermand. The bank was liable to the builder.

Disclosure to Protect the Bank

The bank may disclose to the extent necessary to protect its interests (and usually only to that extent). This proposition appears universal. Instances when disclosure is necessary include when the bank is suing the customer for a default;84 when the bank is moving a claim in the liquidation of a customer; when the customer sues the bank; and when the bank is the “piggy in the middle,” for example, in letter-of-credit disputes between the customer and the beneficiary. In this latter case, the bank may wish to protect its rights of setoff or pledge.

In Austria, a credit card issuer has been held to be permitted to disclose the address of the card owner to a business from which the owner had purchased goods but who instructed the bank not to pay the invoice.85 In New York, it has been held that a borrower from a bank could not complain if the bank divulged that the borrower had defaulted on the loan.86

Disclosure of Crimes

Serious Crime and Money Laundering in General

Most countries permit banks to disclose common crimes to the authorities. In Tournier, it was recognized that a bank may disclose information if this is in the public interest.87 In Canadian Imperial Bank of Commerce v. Sayani,88 a borrower provided financial statements to a trust company in negotiations for a loan. These financial statements allegedly failed to disclose that the borrower had defaulted on a loan to a bank. The trust company sought a credit reference from the bank which disclosed the default. The borrower sued the bank for damages for breach of confidentiality. It was held that the bank had a public duty to disclose the alleged misrepresentation, even if it did not necessarily constitute a fraud or crime. A similar example is the case R v. Curtis89 from New Zealand.

Crimes Covered

Countries differ as to whether statutory disclosure applies to all crimes, all serious crimes, or only certain specified crimes. Legislation covering specified serious crimes will normally apply to fraud (including securities frauds), theft, kidnapping, extortion, blackmail, bribery, official corruption, drug trafficking, terrorism, and insider dealing; but the intensity of legal disapproval differs greatly as compared to the classical crimes.

A special area of concern has been gigantic scams—advance-fee frauds, letter-of-credit frauds, and “prime-bank-guarantee” frauds—which are often very primitive but nevertheless a threat to banks and to unsophisticated persons who are fraudulently deceived.

Other Differences

Reasonable protections for those accused of crimes and the need for due process have always been a central concern in civilized societies and a major preoccupation of constitutional law throughout history. However, countries differ on how to reflect these values. Areas of divergence in this context are:

  • whether criminal proceedings must actually have begun before police authorities can override bank secrecy. (This impedes preliminary investigations and allows tip-offs, but stems from the concept of “innocent until proven guilty.”);

  • whether the lifting of secrecy requires a court order or can be initiated directly by the authorities without judicial supervision to protect the citizen;

  • the degree of control of fishing expeditions, for example, requirements for reasonable prior evidence of a crime and for disclosure of specific documents. (These controls are designed to prevent oppressive investigation.);

  • whether the bank can or must notify the customer in order to protect the customer against unwarranted intrusion. (The disadvantage is that this leads to forewarning a criminal customer.);

  • whether the procedural safeguards or the protection of secrecy itself is more extensive in the case of fiscal and economic crimes, for example, tax evasion;

  • whether banks have a duty to report, as opposed to a mere right to whistle blow; and

  • whether the regime overrides the privilege against self-incrimination.

Domestic Money Laundering

Money laundering is the attempt by criminals to conceal the origins of the proceeds of their crimes—usually cash—by converting traceable “dirty” money into “clean” money, such as bank deposits; gold; and investments in securities, property, or companies. Knowingly participating in money laundering is also considered money laundering. The money laundering process involves the following three steps:

  • placement: direct deposit in banks or the purchase of investments, art, gold, or foreign currency;

  • layering: multiple transactions to confuse the audit trail, for example, multiple transfers, purchase and surrender of insurance policies, use of dummy companies, and purchases of bearer bonds; and

  • integration: the laundered money becomes part of the legitimate economy, for example, as loans or equity investments.

The transactions can be extremely complicated. The main international documents relating to money laundering are:

  • the Statement on the Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering, 1988.90 (The statement was prepared by the Basle Committee on Banking Supervision. It consists of nonlegal ethical principles and is intended to encourage the banking system not to permit money laundering. It was subsequently endorsed by the Offshore Group of Banking Supervisors (19 members including the Cayman Islands, Cyprus, Hong Kong, Jersey, and Singapore) and has resulted in a number of national codes of banking practice.);

  • the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988.91 (The Vienna Convention, as it is commonly referred to, has been ratified by over 100 countries. It sets out minimum standards; requires countries to criminalize drug trafficking and the international laundering of the proceeds;92 and provides for mutual legal assistance.93 This convention specifically overrides bank secrecy.94 It is the most far-reaching multilateral treaty on criminal assistance.);

  • the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime, 1990.95 (In force since 1993, it contemplates that countries can extend the criminalization of money laundering to nondrug offenses, such as serious crime, arms dealing, and terrorism.);

  • the Scheme Relating to Mutual Assistance in Criminal Matters Within the Commonwealth, 1986,96 which was amended in 1990 and subsequently supported by a political intent declaration of 47 out of 50 Commonwealth countries in Cyprus in 1993;

  • the EC Directive on Prevention of the Use of the Financial System for the Purpose of Money Laundering, 1991.97 (This applies to Vienna Convention crimes and to any other crimes designated by member states. Jersey, Guernsey, and the Isle of Man have enacted legislation based on this Directive.);

  • the Organization of American States Model Regulations Concerning Laundering Offenses Connected to Illicit Drug Trafficking and Related Offenses, 1992.98 (This is limited to drug trafficking and related offenses.); and

  • the Forty Recommendations of the Financial Action Task Force.99 (Established in 1989, the Financial Action Task Force has 26 members, including European and Scandinavian countries, plus Australia, Canada, Hong Kong, Japan, New Zealand, Singapore, Turkey, and the United States. There is also a Caribbean Financial Action Task Force centered in Trinidad.)

The main techniques used to control money laundering are transaction size reports and suspicion reports. Transaction size reports are filed by banks to report transactions above a certain size, including connected transactions that individually do not exceed such statutory limit. This blanket system is said to result in an avalanche of filings and to be costly. However, it has a deterrent effect, and suspicions from other sources can be substantiated by the reports. Although bureaucratic and paper intensive, the system is easier for banks. The best known example is the United States, which has a $10,000 threshold.100 Another example is Australia.101

Suspicion reports are filed by banks to report suspicious transactions. It is the approach used in a majority of countries, including the United Kingdom. Forewarning the customer is prohibited. Banks have a defense if they report. Disadvantages of this approach are said to be (i) the system requires sophisticated staff, (ii) bank employees must become amateur detectives/informers, and (iii) the reporting of a suspicion can create a serious slur if unjustified. France has a system for compensating those who are wrongly suspected. Sometimes only transactions above a certain threshold must be reported.

Common to most systems are (i) the need for customer identification (the “know your customer” standard obviates anonymous bank accounts), (ii) recordkeeping and retention requirements, (iii) staff training, and (iv) a prohibition on tipping off the suspect. There is also usually provision for search and seizure.

Country Survey

This part surveys various countries showing the extent to which bank secrecy is eroded by the criminal law, not merely money laundering.

The Bahamas has a fairly typical code of conduct inspired by the Basle principles. The Code of Conduct for Members of the Association of International Banks and Trust Companies in the Bahamas covers cooperation with the central bank, “know your customer” standard, rejection of criminal customers, avoidance of violations of foreign fiscal and exchange control laws, and maintenance of confidentiality.102

Britain has a suspicion-reporting system for money laundering. The rules are extremely complex. Guidance Notes have been issued by the Joint Money-Laundering Steering Group.103 The British money-laundering rules apply to all serious crimes, not just drug-related crimes. Some of the main legislation applying to criminal investigations are the Drug Trafficking Act, 1994; the Prevention of Terrorism (Temporary Provisions) Act, 1989; the Criminal Justice Act, 1993; the Money-Laundering Regulations, 1993; and the Criminal Justice (International Cooperation) Act, 1990.104 Section 9 of the Police and Criminal Evidence Act, 1984, allows the court to order a bank (and others) to disclose to the police certain information material for the purposes of a criminal investigation. The suspect does not have to be informed, because he or she would be forewarned. The Criminal Justice Act, 1987, confers wide powers of investigation on the Serious Fraud Office; the regime is inquisitorial and does not protect against self-incrimination, so that the right to silence is overridden.105

In Tournier, it was recognized that there was an exception to secrecy in the case of the public interest. This exception is generally understood to refer mainly to the reporting of serious crimes.

In addition, the English courts restrict disclosure under the Bankers’ Books Evidence Act, 1879 (which is addressed further in this chapter) and do not allow it to be used for fishing expeditions in the hope of finding evidence to hang a case; there must be other evidence of a crime. The guidelines for criminal actions were laid down in Williams v. Summerfield.106 There must be firm proof that the account is material evidence. The courts will order disclosure in the case of a crime of fraud provided that evidence is shown that the customer is prima facie guilty of fraud.107

In Canada, money-laundering legislation was introduced by amendments to various acts, including the Canadian Criminal Code, to criminalize money laundering in relation to a wide variety of offenses, including drug offenses. The other main offenses cover bribery, fraud, secret commissions, and illegal gambling. In disclosing facts that gave rise to a suspicion of money laundering, the financial institution may rely on an amendment to the Criminal Code, which provides that disclosure to the authorities of a reasonable suspicion of the crimes concerned is justified. In addition, the Proceeds of Crime (Money Laundering) Act of 1991 requires institutions to keep records of transactions above a limit of Can $10,000. Although the Act does not contain reporting obligations, these records are available for reporting transactions under the money-laundering statutes. The Canadian authorities have also issued a policy of Best Practices for Deterring and Detecting Money Laundering.108

In France, bank secrecy under Article 57 of the Banking Law of 1984 is overridden in the case of crimes for which criminal proceedings have begun, including preliminary investigations.109 In certain cases, the bank may not notify the client of the pending investigation or testimony.

In Germany, bank employees are bound to appear as witnesses in criminal proceedings and to testify. An employee can refuse to testify if this involves self-incrimination. In urgent situations, the prosecutor can confiscate evidentiary business documents without prior written court approval, but the search and confiscation must be restricted to evidence essential for the investigation.110 There are other provisions to prevent fishing expeditions.

In regard to Greece, the Bank of Crete litigation in 1988 illustrates international cooperation in the case of criminal fraud.111 In this case, it was alleged that misappropriation had been carried out by the chief executive of the Bank of Crete on a very large scale. By reason of the secrecy laws in Greece, which prevented disclosure to the criminal authorities during investigation (but not during the actual criminal proceedings that were subsequently brought), it initially proved impossible to substantiate the fraud. However, the Bank of Greece received from a New York bank information that revealed that the chief executive of the Bank of Crete had allegedly falsified deposit certificates concerning deposits of the Bank of Crete with the New York bank. This led to an uncovering of the alleged fraud.

Following that case, the 1971 Greek bank secrecy law was amended so as to allow disclosure in criminal proceedings and preliminary investigations by court order, provided the information is absolutely necessary for tracing and punishing a crime punishable with imprisonment of at least five years (that is, the lifting of secrecy applies only to major crimes and not to minor crimes where the secrecy duty continues). The lifting of secrecy applies in initial investigations without the necessity for a criminal prosecution to have been commenced. The law also lifts secrecy in relation to major crimes committed outside Greece, provided the Greek criminal courts have jurisdiction.112 In addition, Law 1916 of December 28, 1990 pierces bank secrecy in relation to certain organized crimes—drug trafficking, murder, serious injury, hostage taking, hijacking, arson, and attacks against military or police installations.113

In Hong Kong, the Commissioner of Banking has issued a statement of principles on the prevention of the criminal use of the banking system including money laundering. In Ireland, there are provisions for the lifting of secrecy. In addition, the Offences Against the State (Amendment) Act, 1985, provides for the suppression of unlawful organizations involved with treason and violence against the state and for the transfer of their funds to the High Court. It has been held that this legislation is not contrary to the property rights guaranteed by the Irish Constitution.114

Italy has a tough anti-Mafia law, which partly implements EC directives on money laundering and partly extends previous legislation in the Criminal Code.115 Under this law, transfers of cash and bearer instruments are void if the total amount involved exceeds Lire 20 million, unless they are made through authorized intermediaries, such as banks, with the result that it is not possible in Italy to conclude any transaction in cash or payment by a freely transferable check in excess of the threshold. The authorized intermediaries must identify the person who executes a registrable transaction, keep records of registrable transactions, and communicate to the police any such transaction if the intermediary has reason to believe that it is connected with certain specified crimes—robbery, larceny for extortion, kidnapping, or drug-related crimes.

In Japan, money-laundering laws were enacted in 1991. These require banks to report their suspicions. Furthermore, in 1992 the authorities issued a memorandum requiring banks to identify their customers and to keep records of transactions. Luxembourg is exceptional in limiting the crime exception (subject to the EC Directive on Money Laundering). If a banker is called upon to testify before a Luxembourg criminal court, he is obliged to appear but may elect to either answer questions or refuse to answer them.116 In the Netherlands, the judicial criminal authorities have large powers to compel third parties, including banks, to hand over documents and other materials in connection with an investigation. Generally, a court order is required, and there must be a reasonable suspicion that a criminal offense has been committed. There are special rules for tax fraud.

In New Zealand, the Serious Fraud Office Act, 1990, gives the Fraud Office wide powers to require the production of documents and to compel the answering of questions. The Fraud Office can disclose the information to any person who the director is satisfied has a proper interest in receiving the information. The New Zealand Proceeds of Crime Act, 1991, deals with money laundering. Pakistan has also issued guidelines on money laundering. The regulations require banks to take precautions against money laundering, but they do not specifically require disclosure of suspected activities to the authorities. However, the Dangerous Drugs Act, 1930, as amended, permits the tracing of assets of convicted drug offenders.

In Singapore, the self-regulating Association of Banks in Singapore has issued a set of guidelines on money laundering, which follow the Basle Committee concepts.117 These guidelines are voluntary. Wide statutory powers allow the criminal authorities to obtain information about bank accounts. In South Korea, bank secrecy is overridden if necessary for evidentiary purposes in criminal proceedings.118

In Switzerland, bankers might be required to testify in the criminal courts under the Federal Code of Criminal Procedure and cantonal criminal procedure statutes, but bank secrecy is protected while the police are still investigating; the override only applies to criminal proceedings. There are protective measures, for example, the sealing of documents so that a judge may assess whether disclosure is necessary. Usually, bankers do not have to testify in administrative proceedings. As to money laundering, the Swiss banks have entered into an Agreement on the Swiss Banks’ Code of Conduct with Regard to the Exercise of Due Diligence, which imposes obligations whereby the banks must establish the identity of their clients, refuse funds of criminal origin, and refuse assistance in capital flight and tax fraud.119 The bank controlling authority can impose fines for noncompliance. Article 305 of the Swiss Penal Code penalizes money laundering.

In the United States, in relation to governmental enquiries the common law rule of privacy of financial records no longer exists. This results primarily from a succession of laws designed to reduce crime and improve the investigation of regulatory and tax violations. Generally, information may be exchanged between government agencies in connection with law enforcement. The main legislation is as follows: the Bank Secrecy Act of 1970, which includes the Currency and Foreign Transactions Reporting Act;120 the Right to Financial Privacy Act of 1978;121 and the Money Laundering Control Act of 1986.122 The legislation is heavily amended and accompanied by ancillary regulations and other legislation.

The Right to Financial Privacy Act of 1978123 applies only to individuals and certain small partnerships, and not to corporations. It does not set out a substantial right of financial privacy on the lines of bank secrecy legislation in other jurisdictions. Instead, it merely sets out a number of procedural safeguards for the individual, for example, the necessity for some official or judicial order, compliance certificates by requesting agencies, and information on how a customer may judicially challenge disclosure—in each case subject to exceptions—for example, to prevent tipping off. There are a large number of other exceptions. This legislation is echoed by similar legislation in a number of states, for example, California and Illinois.

The basic object of the Bank Secrecy Act124 is to require financial institutions to report certain domestic and foreign financial transactions to the authorities. These include deposits, withdrawals and transfers, and transports of currency or monetary instruments in an aggregate amount exceeding $10,000. Persons who receive an excess of $10,000 in the aggregate in U.S. currency or other monetary instruments from outside the United States must also report. Persons subject to the jurisdiction of the United States, including U.S. citizens abroad, must disclose their interests in foreign bank accounts and the like exceeding $10,000. There are various exceptions, for example, for cash businesses, such as restaurants and retail businesses. Provisions deal with “structuring” (popularly known as “smurfing”) whereby the threshold of $10,000 is avoided by dividing up transactions.

The Money Laundering Control Act of 1986 provides that money laundering is a criminal offense and penalizes both those who launder and those who facilitate the laundering.125 The Act covers more than 30 criminal offenses ranging from espionage and trading with the enemy to narcotics trafficking. Criminal intent or knowledge must be proved, and, in this respect, the Act appears more respectful of traditional criminal law than the corresponding EC Directive.126

Disclosure by banks of suspicious transactions under the Money Laundering Act is voluntary rather than mandatory.127 However, disclosure is encouraged because complicity is a serious criminal offense. Good faith disclosure of suspicions to the authorities can be made without any subpoena or court order, and, in such a case, the disclosing institution is protected from liability. The risk of liability for failure to report is heightened by virtue of a decision that a bank’s knowledge is a summing up of the knowledge of all the bank’s employees.128 There are both civil and criminal remedies under the legislation, including regulatory powers to impose sanctions. Violations are relevant to the official approval of bank acquisitions.

International Cooperation on Money Laundering and Crime

Prescriptive Jurisdiction

As previously mentioned, the basic international position is that one country cannot legislate for another and cannot arrest or interrogate suspects on the territory of another country without the consent of that country. However, this is a very basic rule and is subject to numerous exceptions in national practice. International rules concerning the ability of a country to control criminal conduct—its prescriptive jurisdiction—make distinctions between the bases of such jurisdiction. While other classifications may be recognized, the author would conceptualize them as follows:

  • Countries can punish crimes committed within their territory and injuring a person within their territory—the objective territorial principle.

  • Countries can punish crimes committed within their territory and injuring a person outside their territory—the subjective territorial principle. The textbook example is firing a gun across a border. Another example is sending a fraudulent prospectus or obscene material abroad. Countries do not allow their territory to be used to peddle poison to foreigners. The territorial link is that an essential element of the crime is committed locally.

  • Countries can punish crimes committed abroad that have an adverse effect locally—the protection principle or effects doctrine. An example is insider dealing abroad in securities on a national market. This is more controversial, particularly in the field of economic crimes, such as antitrust, and is rejected by many countries in relation to exchange controls.

  • Countries can punish crimes committed by their nationals, wherever they may be—the nationality principle. For example, U.K. legislation punishes, among other things, treason, murder, bigamy, and breaches of the Official Secret Acts by nationals wherever committed.

  • Countries can punish crimes wherever committed if the crime is so serious or so dangerous to international order as to require international action—the universality principle. Examples are common crimes, such as murder, and grossly repugnant crimes, such as terrorism, war crimes, and hijacking. Crimes that essentially require international cooperation, such as narcotics trafficking, may have joined this list.

Multilateral Conventions

The main multilateral conventions on mutual assistance in criminal matters include the European Convention on Extradition, 1957;129 the European Convention on Mutual Assistance in Criminal Matters of 1959;130 the Inter-American Convention on Mutual Assistance in Criminal Matters of 1992;131 the UN Convention132 and EC Directive133 on money laundering, mentioned previously; and a number of earlier multilateral treaties dealing with specific crimes, such as counterfeiting.

Bilateral Treaties

There are many bilateral treaties on mutual assistance in criminal matters. The following are a few examples.

The Bahamas has treaties with Canada, the United Kingdom, and the United States under its Mutual Legal Assistance (Criminal Matters) Act, 1988, which excludes foreign taxes and exchange controls. The Cayman Islands has similar treaties with Canada, the United Kingdom, and the United States. The mutual legal assistance treaties of the late 1980s between the Bahamas, the Cayman Islands, and the United States are of particular interest because the Bahamas and the Cayman Islands have criminalized breaches of bank secrecy. These treaties override bank secrecy but are subject to a court order. In both cases, two weaknesses of British imperial extradition treaties—that criminal proceedings actually be pending and that the application is inter partes, resulting in the criminal being forewarned—are removed. However, a court order is still required.

For Canada, there is a Canada-U.S. Treaty on Mutual Legal Assistance in Criminal Matters of 1985, which provides for cooperation in most major criminal and regulatory offenses. It provides for exchanges of information, taking of evidence, the production of documents, search and seizure procedures, and the temporary transfer of detained persons. However, the evidentiary and procedural rules of the requested authorities and constitutional protections apply to these proceedings. This treaty is not applicable to private litigants. Canada has similar treaties with, for example, Australia, the Bahamas, France, Mexico, and the Netherlands.

The UN has developed a number of model treaties, for example, the Model Treaty on Mutual Assistance in Criminal Matters.134

Unilateral Cooperation Without a Treaty

Most legally developed countries have extradition laws and statutes dealing with international criminal cooperation and legal assistance to foreign authorities. Many of the older statutes stemmed from the desire to catch fleeing thieves and murderers and are ill-adapted to transnational fraud.

Typical restrictions are (i) the conduct must be a crime in the home country, usually a serious crime (the principle of double criminality); (ii) reciprocity; (iii) an exclusion if local proceedings are pending against the accused (to avoid double jeopardy); (iv) an exclusion of economic crimes, for example, tax, antitrust, and exchange control laws; (v) an overriding exclusion if the assistance impairs essential national interests or violates public policy; and (vi) a human rights exception, for example, racial, political, or abusive proceedings, or the absence of minimum protections for the accused. Some of these exclusions are found in Austria (although cooperation is possible on fiscal offenses) and also in Switzerland. Sometimes these laws and statutes require that proceedings must have been commenced and that the proceedings are inter partes—so that the fraudster is forewarned. These are typical restrictions in the older British imperial extradition legislation.

A few illustrations may be given. Both the Bahamas and the Cayman Islands have criminalized breaches of bank secrecy. However, these statutes are not permitted to be used as a blanket to facilitate crime or fraud. In United States v. LeMire, the Cayman Islands Court of Appeal ordered disclosure of account information at the request of foreign authorities.135 The charges had been filed, and the offense would have been a crime in the Cayman Islands. It was held that the Cayman Islands’ confidentiality law should not be used to shield criminals. A similar conclusion was reached in the Bahamas case of Royal Bank of Canada v. Apollo Development Ltd., provided that the request is not a fishing expedition.136 However, a U.S. subpoena in a tax case was rejected by the Bahamian court in Re Bank of America.137 The court enjoined the local branch of the U.S. bank from complying with the U.S. order to produce customer information.

One of the most celebrated cases was the U.S. case involving the Bank of Nova Scotia (BNS) in the 1980s. A customer of the Bahamian branch of BNS was being tried in the United States for tax and narcotics violations. The U.S. court issued a subpoena to BNS requiring it to produce documents relating to its customer. The bank refused to do so on the ground that this would be a violation of Bahamian secrecy laws. It was held that the bank should be obliged to comply and was guilty of contempt. Fines were imposed at the rate of $25,000 a day, finally totaling $1,825,000. On appeal, the action of the lower court was confirmed.138 In SEC v. Banca Delia Svizzeria Italiana, the U.S. Securities and Exchange Commission (SEC) attempted to obtain information from the bank about its customers in connection with an insider trading investigation.139 The bank refused on grounds of Swiss secrecy and the U.S. court froze their New York bank account. Subsequently, the bank obtained the consent of their customers.

In Britain, a court can order disclosure in order to assist an investigation by a law enforcement agency of another convention country.140 This is not confined to treaty countries. Previously extradition legislation allowed disclosure. In Bonalumi v. Home Dept., Bonalumi was accused of criminal fraud in a Swedish court.141 The U.K. government minister obtained a court order under Section 7 of the Bankers’ Books Evidence Act, 1979, for inspection of the customer’s bank account in England. The Extradition Act, 1873, applied. It was held that no appeal lay from the original court’s order for disclosure.

Canada will cooperate unilaterally in an appropriate case even if there is no treaty. In the Canadian criminal case Spencer v. The Queen, the Canadian Supreme Court required disclosure by a Royal Bank of Canada employee living in Canada of the affairs of the bank’s customer in the Bahamas even though that disclosure was a breach of Bahamian law and even though giving the evidence in Canada was a crime in the Bahamas.142

In Luxembourg, in the absence of a treaty an investigating judge may only carry out a letter rogatory from a foreign prosecutor if the judge has been previously authorized to do so by the Ministry of Justice and in cases where the offender may also be extradited, so that this excludes any cooperation in matters relating to taxes, customs, exchange control, and restrictions on trade (except narcotics). Generally, the authorities are cautious in allowing judicial cooperation except in the case of very serious criminal offenses and will not do so where a letter rogatory hides an alleged tax offense behind an apparent criminal offense. This view was emphasized in the Ambrosiano litigation.143 Luxembourg is a party to the European Convention on Judicial Co-operation in Criminal Matters of 1959144 and to the Benelux treaty on Judicial Co-operation in Criminal Matters of 1962.145

In Switzerland, mutual assistance is primarily determined by the Swiss Legal Assistance Act of 1981, with an accompanying ordinance of 1982. The grant of assistance is discretionary in the absence of a treaty. The Act contains restrictions along the lines of that above, except that reciprocity is not an absolute requirement. If cantonal law gives a right of refusal, then the persons entitled to the right cannot be obliged to furnish evidence to a foreign authority. Political, fiscal, and military offenses are excluded, except in the case of serious fiscal fraud, which is more than just a lie but a series of lies and falsification. Switzerland is a party to the European Convention on Mutual Assistance in Criminal Matters, 1959.146 There is also the United States-Switzerland Treaty for Mutual Assistance in Criminal Matters, 1977, which contains similar principles to the 1959 European Convention, although it is more detailed.147 There are more relaxed provisions in the Treaty for organized crime, which override bank secrecy even in the case of tax evasion.

The United States has a large number of exchange of information or mutual assistance treaties, including ones with the Bahamas, Barbados, Bermuda, the British Virgin Islands, the Cayman Islands, Costa Rica, Cyprus, Dominica, Dominican Republic, Grenada, Marshall Islands, Mexico, Peru, St. Lucia, St. Vincent and the Grenadines, and the Turks and Caicos.148

Insider Dealing

National Statutes

Insider dealing occurs when a privileged insider of a company, such as an officer or professional adviser, who has sensitive information gained by virtue of his relationship with the company and who exploits that information to make a profit or avoid a loss by dealing in the securities of such company, the price of which would have been materially altered if the information had been disclosed publicly. The classic cases are where an insider has advance information about financial statements, a takeover, or some upturn or downturn in a company’s fortunes. An EC Directive of 1989 on Insider Dealing requires member states to criminalize insider dealing and tipping in relation to certain securities markets.149

Apart from EU member states, other countries with insider dealing legislation include Australia, Canada, Indonesia, Mexico, New Zealand, Philippines, Singapore, Switzerland, South Africa, Thailand, and the United States. In Hong Kong, insider dealing is covered by the Securities Ordinance.150 A tribunal established under the Ordinance has wide powers to inspect books and documents; its authority overrides bank secrecy.

English legislation permits inspectors who carry out investigations in relation to financial services to call for information from banks concerning suspected contraventions by a customer.151

International Cooperation on Insider Dealing

As to Europe, the EC Directive on Insider Dealing requires member states to outlaw insider dealing in relation to certain securities and provides for the cross-border sharing of information.152 Article 8(2) provides that the competent authorities must be given all supervisory and investigatory powers that are necessary for the exercise of their enforcement functions. Employees of competent authorities are bound by professional secrecy “except by virtue of provisions laid down by law.”153 Pursuant to Article 10, the competent authorities must cooperate for the purposes of carrying out their duties and shall exchange information required for that purpose. Recipients must observe the professional secrecy applicable to the receiving authority.154 They must only use the information for the exercise of their functions and in the context of administrative or judicial proceedings specifically relating to the exercise of those functions, subject to (i) obligations in judicial proceedings under the criminal law and (ii) use for other purposes or forwarding to other countries’ competent authorities with the consent of the communicating authority.155 Competent authorities may refuse to exchange information if, among other things, communication might affect the sovereignty, security, or public policy of the country addressed.156

In the U.S. insider dealing case of SEC v. Levine,157 the SEC was able to obtain information from Bahamian banks pursuant to a request through the Bahamian Attorney General. In Switzerland, insider trading was criminalized in 1988 by a change in the Penal Code of 1937.158 Bank secrecy can be lifted for domestic cases and, in the case of judicial assistance in foreign proceedings, where insider trading is a crime abroad. By virtue of a special Memorandum of Understanding, 1987, with the United States, Switzerland agreed to grant assistance in “civil proceedings” concerning insider trading conducted by the SEC—as a relaxation of the usual requirement for mutual assistance that the proceedings be criminal. In Re Santa Fe,159 the SEC was able to obtain information from Swiss banks under the 1977 United States-Switzerland Treaty for Mutual Assistance in Criminal Matters.

Disclosure to Banking Supervisors

National Supervision

Banking authorization and supervision is primarily intended to (i) protect depositors against fraud and insolvency, and (ii) protect the financial system against cascading or domino collapses—systemic risk. Apart from authorization, the main topics of financial supervision are capital adequacy; large exposures to single or related institutions, for example, a limit of 10 percent; liquidity; systems and controls; foreign exchange risk; and ownership and management. Regulators are commonly either central banks, for example, the Bank of England and the Bundesbank, or specialist supervisors, for example, the country and federal regulators in the United States (other than the Board of Governors of the Federal Reserve System).

Invariably, secrecy is lifted toward the regulatory authority. Obviously, regulators cannot regulate without information. Thus, the obligation to disclose large transactions showing large exposures involves disclosing a customer’s confidential information. A risk for regulators is leakage of information or wrongful use of information. Domestic statutes and international treaties commonly require regulators to use information only for regulatory purposes and to maintain secrecy, subject only to the statutory gateways. Breaches are often criminalized.

In Britain, the Bank of England can require authorized institutions to provide such information and documents as it may reasonably require for the performance of its functions under the Bank Act, 1987.160 These powers may be exercised in relation to corporations, directors, controllers, and managers. The Bank of England may not disclose the information unless it is in the public domain or in summary form, so that information relating to any particular person cannot be ascertained from it.161 However, the Bank of England may disclose for the purpose of enabling or assisting it to discharge its functions162 or to provide information to a number of other supervisors,163 as well as in various other circumstances.164

The English courts have authorized disclosure outside the statutory permission. In Price Waterhouse v. BCCI Holdings (Luxembourg) SA,165 the U.K. government set up an inquiry into the affairs of a failed bank, BCCI. Price Waterhouse wished to make voluntary disclosures to the inquiry. There was no statutory provision allowing them to do so, but their involvement in the attempted rescue of BCCI had allowed them to acquire confidential information. The court held that the public interest required effective supervision of authorized banking institutions and the protection of deposits. These factors prevailed over the interests of confidentiality. Price Waterhouse was permitted to give information to the inquiry, subject to various restrictions to limit unnecessary breaches of secrecy.

The Bank of England’s powers to call for information override the privilege of self-incrimination—the “right to silence.” In Bank of England v. Riley,166 a lady was prosecuted for theft. She had allegedly operated organizations that illegally obtained money from the public. The Bank of England, pursuant to its supervisory powers, obtained a court order requiring that she answer interrogatories as to the whereabouts of her assets. The supervisory powers allow the Bank of England to require a person to produce such information as it might reasonably need for the investigation of a suspected contravention of the Bank Act, 1987. The lady objected by relying on the privilege against self-incrimination. The court held that Section 42(1) of the Bank Act creates a duty for those suspected of contravening the Act to provide the requested information. This duty trumps the privilege against self-incrimination.

In addition, the power of the Bank of England to require information to carry out its supervisory duties overrides an injunction enjoining bank secrecy. In A v. B Bank,167 the U.S. Federal Reserve Board was investigating a bank that traded in England. A New York court ordered the bank to produce customer documents. This order was blocked by an injunction of the English courts obtained by the customers. Based on information from the Federal Reserve, the Bank of England demanded documents from the bank relating to the customers, pursuant to its powers in the Bank Act. The court held that the Bank of England’s request was pursuant to powers that overrode the injunction. The bank was ordered to produce the requested documents. The court stressed the importance of the Bank of England having unfettered scope, within the limits of the law, for the exercise of its duties of regulation in the interests of the public.

In England, it has been held that, where a criminal remedy is imposed for breach of secrecy by a regulatory authority supervising investment businesses, a private party injured by this disclosure does not have a private right to sue the regulator for damages. The only available remedy to the injured party is to seek judicial review of any anticipated disclosure (which is too late if the disclosure has already been made).168

A key question is whether supervisory information is immune from compulsory disclosure in civil litigation on the grounds of public interest—originating in the proposition that matters of defense and other essential country communications should not be disclosed in courts at the behest of private litigants.

The question of whether information supplied by a regulated bank to a supervising authority is immune from disclosure in civil litigation has been litigated in England. In Kaufman v. Credit Lyonnais,169 the bank supplied documents to an investment business regulatory authority in the United Kingdom. The plaintiff alleged breach of duty in relation to the bank’s management of his investments and requested disclosure of the documents supplied by the bank to the regulator in the hope that these documents might disclose evidence to support his case. The bank maintained that the documents were protected by public immunity. In other words, disclosure was contrary to the public interest. The court held that the bank was not entitled to withhold discovery of a class of documents on the ground of public immunity. The purpose of the regulatory scheme was the protection of investors. This purpose overrode the desire to encourage candor between the regulator and the regulated.

In France, banking secrecy cannot be invoked against the banking supervisory authorities under Article 57(2) of the banking law of January 24, 1984.170 Similarly, secrecy cannot be invoked against the Securities Exchange Commission who, by a law of 1967, modified in 1989,171 can have all documents of whatever nature handed to it and obtain copies thereof. The Commission can summon and hear any person who is likely to provide information. The Commission’s authorities also may enter premises. Professional secrecy cannot be invoked against it.

In Germany, the Banking Act (Kreditwesengesetz) gives the bank supervisory authorities the right to demand information on any business matter, request the submission of books and documents, and carry out investigations without giving specific reasons.172 The supervisors may enter the bank’s offices. They may only demand information that is necessary to fulfill the tasks provided in the Banking Act. Specific reporting requirements exist to satisfy the various rules about exposures and the like.

In Greece, the strict banking secrecy is not operative against the Bank of Greece, the courts, and investigating parliamentary committees concerned with the control of credit institutions in the discharge of their functions. A 1989 law allowed the lifting of secrecy for banks placed under compulsory governorship and for commencement of criminal prosecutions against the managements of banks relating to their administration where the crime “has aroused a public outcry”—a reference to the Bank of Crete case.173

In Japan, the usual exception in favor of the banking supervisors exists, but it is subject to certain exceptions. In Switzerland, Swiss banks and Swiss branches of foreign banks must provide all information concerning their Swiss business to the country’s regulatory authorities. The Swiss regulatory authorities may use the information disclosed to them only within the scope of their statutory functions. Employees of the regulatory authorities are strictly bound by secrecy. Other authorities, such as the Zurich Stock Exchange Commission, may also be bound by secrecy.

International Supervision

Banking is an international business that knows no boundaries. Major international banks commonly have branches and subsidiaries abroad. Effective supervision requires that banks be supervised as a whole.

A number of issues are relevant to supervisory information. These issues include the conflict between flexible discretions and the straight-jacket of black-letter law; the desire to ensure that employees of supervisors, as overseers of banking integrity, should not themselves be the source of leaks;174 the risks imposed by disclosing information to supervisors in countries with a lax view of bank secrecy; the risks imposed by legal actions against supervisors, blaming them if a bank should fail (“big pocket” liability); the need to handle potential bank failures sensitively to avoid either making things worse or provoking systemic cascades; and the objection in some countries to the sharing of information with the fiscal authorities or authorities in the nonfinancial sector.

The usual pattern is that the national banking legislation permits the supervisors to disclose information they are entitled to gather from national banks to foreign supervisors, generally on condition of secrecy. Practice differs as to whether nonbanking supervisors, such as supervisors of insurers, securities firms, or general corporations, can receive information and whether the receiving supervisors can share this information with other authorities, for example, the fiscal authorities. Often the latter requires a consent from the communicating authority.

European Union

In the European Union, banks have a single passport to operate throughout the European Union. A system of allocating the main supervisory duty to the home country’s supervisors also exists. This arrangement relies on an exchange of information.175

Under Article 12(1) of the First Banking Directive, employees of competent authorities, as well as their auditors and experts, are bound by professional secrecy covering confidential information acquired in the course of their duties.176 Competent authorities receiving confidential information may use it only in the course of their duties (i) for authorization, (ii) for financial supervision, (iii) to impose sanctions, (iv) in appeals against regulator’s decisions, and (v) in court proceedings pursuant to directives on credit institutions.177

Exceptions (Gateways)

Numerous exceptions, also known as “gateways,” permit the disclosure of confidential information. The exceptions, which flow from Article 12(1) of the First Banking Directive, include nonconfidential information; information not acquired in the course of competent authorities’ duties; information in summary or collective form, such that individual institutions cannot be identified; information relating to cases covered by the criminal law;178 and information that does not concern third parties involved in rescue attempts. In the latter case, such information may be divulged in civil and commercial proceedings when a credit institution has been declared bankrupt or is being wound up. Another exception allows competent authorities to exchange information in accordance with the directives applicable to credit institutions.

Under Article 12(2), the information received is subject to Article 12(1) secrecy conditions and to Article 12(4) restricted uses of the information.

Article 12(3) permits member states to conclude cooperation agreements that provide for the exchange of information with the competent authorities of third countries only if the information is subject to guarantees of secrecy at least equivalent to those in Article 12. This safeguard is to protect information disclosed to countries with lax secrecy rules.

Article 12(5) allows exchanges between competent authorities in one or more member states and regulators of other financial organizations, such as insurers and financial markets. This article also permits exchanges between competent authorities and (i) statutory auditors and (ii) bodies involved in the insolvency proceedings affecting credit institutions. The exchange, however, must be in the discharge of their supervisory functions. Information received is subject to the Article 12(1) secrecy duty. Article 12(5) also permits the disclosure in member states or between member states to deposit guarantee schemes of information necessary for the exercise of their functions. Again, information received is subject to the Article 12(1) secrecy duty.

Exchanges of information between competent authorities and authorities responsible for overseeing the insolvency of financial undertakings, or authorities responsible for overseeing statutory auditors of insurers, credit institutions, investment firms, and other financial institutions, may occur at the option of member states. The information obtained, however, must be used only for the overseeing task, subject to the Article 12(1) secrecy duty, and disclosed only with the agreement of the disclosing competent authority in that member state.

Under Article 12(5b), exchange of information between competent authorities and authorities responsible for the detection and investigation of breaches of company law (including private sector appointees), with the aim of strengthening the stability and integrity of the financial system and subject to similar conditions as in the previous exception, may occur at the option of the member state.

Article 12(6) permits disclosure to central banks, monetary authorities, and public authorities overseeing payment systems for the performance of their tasks. Information is subject to the Article 12(1) secrecy duties.

Member states may disclose information to central government departments responsible for legislation in the financial and insurance sectors. Disclosure to inspectors acting on behalf of those departments is also permitted, but only where necessary for reasons of prudential control. This probably includes parliamentary commissions of enquiry. Information may only be disclosed under the exceptions in Article 12(2) (exchanges between competent authorities) and Article 12(5) (disclosure to other regulators) with the consent of the disclosing competent authority.

Under Article 12(8), disclosure to recognized member states’ clearing or settlement systems may occur to ensure their proper functioning in relation to defaults or potential defaults by market participants. Under this exception, however, disclosure of information permitted to be exchanged between member state competent authorities by Article 12(2) requires the consent of the disclosing competent authorities.

Auditors, and the like, must disclose to the competent authorities facts of which they are aware and which are liable to show material breaches of authorization conditions or rules that specifically govern the activities of finance undertakings, affect the continuous functioning of the financial undertakings, or lead to refusal to certify the accounts or to reservations. This duty also applies to controlling affiliates as defined. Auditors disclosing in good faith are protected (including against breach of secrecy contracts or laws).

There is no exception for other national legal requirements, such as discovery in ordinary civil litigation. The closing of this loophole resulted from the holding in Municipality of Hillegom v. Hillenius,179 which interpreted a previous version of Article 12. In this case, a Dutch municipality lost money with a branch of a foreign bank that failed. They alleged that the Dutch central bank should have acted on information received from supervisors in other member states. The Dutch supervisor refused to answer questions, as required by Dutch rules on compulsory evidence. At that time, the unamended Article 12(1) allowed disclosure “by virtue of provisions laid down by law.” The court seems to have held that member states can allow exceptions subject to the overall objectives of the First Banking Directive. In other words, a fettered discretion to opt out exists.

This list of exceptions is probably exhaustive. The possibility of disclosure, however, also exists under other directives, for instance the Money-Laundering Directive.180

Country Examples

In Britain, Section 84(6) of the Bank Act, 1987, allows disclosure to foreign supervisors in the fields of banking (and other credit or deposit forms), insurance, investment business, and insider dealing for the purposes of their functions. Under Section 86, incoming information is protected by secrecy roughly corresponding to the secrecy imposed on the Bank of England.

However, in Britain the courts allowed a private bank to provide information to a foreign supervisor outside the statutory scheme in two cases. First, in Libyan Arab Foreign Bank v. Bankers Trust Co.,181 the United States imposed a worldwide freeze on dealings with Libya. The London branch of Bankers Trust disclosed details of the Libyan Arab Foreign Bank’s London account to the Federal Reserve in New York. The court held tentatively that a bank might have a higher public duty in the circumstances to disclose to its principal supervisor. Second, in Femis-Bank Anguilla Ltd. v. Lazar,182 the court refused to enjoin a party alleging dishonesty and breach of regulation by an offshore bank from providing information to overseas regulatory authorities, since a public interest existed in determining the credibility of the allegations.

The willingness of the English courts to permit disclosure to foreign authorities in the case of banking supervision is particularly noticeable, especially where fraud is alleged. In Bank of Crete SA v. Koskotas (No. 2),183 the chief executive of a Greek bank allegedly misappropriated $200 million. Court orders were made in England ordering various banks to disclose to the Bank of Crete information relating to customers of the banks. The court ordered that the information could only be used for the Bank of Crete actions against the defendants in England. However, the supervisory authorities in Greece were also carrying out an investigation into the alleged misappropriation and required disclosure of the information. The court permitted the Bank of Crete to supply the information to any person to whom it was legally compelled, under the law of a foreign jurisdiction, to provide the information. In these “exceptional circumstances,” the court would not put the Bank of Crete in the impossible position of either infringing the court’s disclosure order or else contravening Greek law.

In Denmark, banks must release to the supervisory authorities all necessary information. The usual secrecy duty on employees of the authority backed by criminal sanctions exists, but the Financial Supervisory Board can transfer the confidential information to other public authorities, such as the police, certain courts, and foreign central banks, subject again to confidentiality.

In Finland, the Banking Supervision Authority has a right to inspect all documents concerning the bank under inspection as well as customer information. The authorities can inspect branches abroad, if locally permitted, and can exchange information with a foreign supervisor, subject to reciprocity.

In Luxembourg, the Luxembourg Monetary Institute (IML) has wide powers to investigate credit establishments by virtue of a 1984 law.184 The IML can communicate information regarding supervision of the financial sector to foreign supervisory authorities, but it is obliged to refuse communication if the foreign authority is neither required to observe professional secrecy nor required to use the information exclusively for the purposes of supervising credit establishments.

In Switzerland, the Federal Law on Banks and Savings Banks of 1934 (as amended in 1995) allows the Federal Banking Commission to transmit confidential information and documents to foreign supervisory authorities, provided (i) the information is used exclusively to supervise directly banks or other supervised financial institutions, (ii) the foreign authorities are bound by official or professional secrecy, and (iii) the information is not passed on to other supervisory authorities without the prior consent of the Federal Banking Commission or by virtue of a general authorization under an international treaty.185 The transmittal of information to prosecution authorities is not permitted if legal assistance in criminal matters is not available.

To the extent information transmitted to foreign supervisory authorities relates to individual banking clients, the transfer of such information is subject to a formal decision. A bank customer may appeal this decision. Provisions for consolidated supervision altering the provision of information to foreign parties for supervisory principles also exist, subject to conditions.

Disclosure to Supervisors of Securities Firms

Generally, the degree to which banking secrecy is overridden in the case of securities regulation is similar to that applying to bank supervision, although it may well be that the securities legislation lags behind banking regulation in many countries. This topic is not dealt with in detail in this chapter.

In Britain, the Financial Services Act, 1986, as amended,186 contains extensive powers of investigation by the various supervisory authorities very much along the lines of the banking powers. In Hong Kong, Section 127(1) of Chapter 333 of the Securities Ordinance empowers the Hong Kong Securities and Futures Commission to appoint an inspector to investigate fraud and misfeasance in relation to securities dealing and the giving of investment advice.187 An inspector also may require a bank to produce documents relating to a matter under investigation. English-based jurisdictions appear on the whole not to regard U.S. grand jury proceedings as a proper proceeding leading to a trial, but rather as a non-admissible fishing expedition.188

Corporate Disclosure and Governance

Corporate Disclosure and Audit

In developed jurisdictions, corporations, including banks, that issue securities to the public or list their securities must provide information necessary to enable investors to make an informed judgment about the worth of the securities. There may also be disclosure rules directed toward the prevention of mismanagement and the disclosure of concealed ownership.

Most of the information is nonspecific, so that particular customers are not identified. However, because auditors must often now verify a bank’s compliance with banking laws, including those related to financial supervision, disclosure is unavoidable. Bank auditors are invariably subject to a secrecy duty as an extension of the bank secrecy duty (as in Switzerland) or by virtue of their professional rules.

The main issues of disclosure are public financial statements of banks, prospectus and listing disclosure for securities issued by banks, official corporate investigations for suspected mismanagement, disclosure of beneficial holdings in public companies above a certain threshold,189 and investigations into suspected corporate offenses.190

Official investigations into corporations for suspected mismanagement will trump bank secrecy in Britain, Ireland, and Australia in certain instances. Banks themselves are usually subject to rigorous investigation procedures under banking legislation. In Britain, bank secrecy may be overridden by investigations into the affairs of all (public) corporations including banks.191 In Ireland, the Companies Act, 1990,192 provides in similar terms for inspections where there are circumstances suggesting, among other things, that the affairs of the company are being conducted fraudulently or for an unlawful purpose. The inspectors have powers to call for information and documents. These powers override bank secrecy. In Chestvale Properties Ltd. v. Glackin,193 the court held that, although inspectors have extensive powers, they must adhere to the rules of natural and constitutional justice when exercising functions of a judicial nature that are not merely investigative. Among the principles of natural justice are the rules against bias and the right of each party to be heard. In Australia, the wide powers under the Securities Commission Act of 1989194 appear to allow fishing expeditions.195

In Switzerland, the management of a Swiss branch or subsidiary of a foreign bank must only furnish general information that would not entail a breach of bank secrecy to the auditors. In the case of an unrestricted audit, the auditors are deemed mandatories of the Swiss bank. This designation subjects them to the Swiss secrecy law.

Disclosure to Tax Authorities

National Taxes

Obviously, there is no secrecy in relation to the bank’s own tax affairs. Fiscal authorities are subject to secrecy duties in most developed countries, for example, the duties imposed under official secrets legislation.

Most jurisdictions permit disclosure to the domestic tax authorities in relation to the tax affairs of customers. Often banks are under a positive duty to report certain information (for example, the income earned by customers on their accounts and securities). In many countries, the tax authorities have agreed to voluntary codes limiting their admittedly draconian powers of surveillance and search and seizure. Vetting procedures as a buffer between banks and the authorities may exist.

In some countries, all transactions above a certain size must be reported in order to prevent tax evasion.196 Apart from tax haven countries, one of the most restrictive countries appears to be Greece, followed by Luxembourg, Austria, and Switzerland. Tax legislation is extremely ephemeral. It is difficult to pin down the up-to-date position in any particular case.

In Australia, the tax authorities’ powers are extensive. It has been held that the duty of disclosure does not apply if the bank account benefits from legal professional privilege, although this is a narrow exception because the accounts must be the subject of legal advice.197 Australia does not permit general fishing expeditions by the tax authorities.198

In Austria, the ability of the fiscal authorities to obtain information is limited by several factors. These factors include (i) there must be an offense, not a mere irregularity, (ii) the proceedings must have been instituted, (iii) information must be relevant to the offense, and (iv) the suspicion sought to be confirmed must be well founded and reasonable.

In Britain, the Taxes Management Act, 1970,199 gives wide powers to the revenue authorities to call for information and returns, including interest earned. The Income and Corporation Taxes Act, 1988,200 gives the Commissioner of Inland Revenue the power to call for information relating to the transfer of assets abroad. The court will disallow excessive requests.201

In Canada, taxing statutes are both federal and provincial. Under federal legislation, Revenue Canada has wide powers to examine third-party books and records, including bank accounts, even if this leads to the disclosure of information about the bank’s customers who are not themselves under investigation.202 Revenue Canada has a voluntary code of conduct. In Denmark, fiscal authorities have wide powers of access to bank information. There are somewhat similar provisions in Finland.

In France, the Tax Procedure Code provides that all organizations must provide tax information on request without invoking professional secrecy. The courts have held that secrecy cannot be invoked against tax authorities.203 The tax authorities have a voluntary code of restraint. Similar provisions apply to customs authorities.

In Germany, distinctions are made between the types of tax proceedings.204 Banking secrecy is overridden when the tax authorities have the right to information, but there is a detailed statutory code for the protection of bank customers. The widest right to information is under the Inheritance Tax Law.205

In Greece, the tax authorities are not permitted to lift bank secrecy as regards bank deposits. This approach is the better view, but few countries have adopted it. An Athens appeals court held that the country is not permitted to seize a deposit to satisfy an income tax liability.206 In another case, the tax authorities applied for information from a Greek bank regarding amounts collected by shopkeeper customers through sales under a credit card. The court held that the bank need not supply the information because secrecy of deposits also included operations on the account such as withdrawals.207

Hungary and Poland proposed, in the mid-1990s, to give the tax authorities access to bank information.

In Italy, the powers of tax investigation into bank accounts were substantially widened in 1992.208 The tax authorities now have the power to call for documents and perform inspections, as well as lift bank secrecy, if there is an audit of the taxpayer, regardless of the nature of the suspected violation, the amounts involved, or any other circumstances. No court order is required. However, information may be sought only through the head office of a bank in order to prevent undesirable rumors around investigated customers. Banks must give notice of the investigation to customers as a matter of private contract law. The tax authorities are subject to duties of confidence.

In Luxembourg, the tax authorities’ rights are very restricted. A Grand-Ducal Decree of March 24, 1989 provides that the domestic tax authorities are not permitted to seek information from banks concerning their customers.209 There are a few exceptions to this rule. These exceptions include the inheritance tax, the assessment of registration or mortgage duties, and the value-added tax. However, in effect, the 1989 Decree insulated banking secrecy from the domestic tax authorities. Generally, in Luxembourg banking secrecy is extremely tight compared to other jurisdictions. This is so even though German fiscal legislation introduced in Luxembourg in World War II prohibits the keeping of professional secrets from the tax administration. The tax authorities have never invoked this legislation and merely keep it for the purposes of enabling mutual assistance with the tax authorities of other countries.

In Mexico, the text on banking secrecy in Article 117 of the Credit Institutions Law of 1990 permits disclosure pursuant to a request of the federal tax authorities through the National Banking Commission for tax purposes.

In the Netherlands, the tax authorities have wide powers to override banking secrecy under Article 49 of the General Law of the Kingdom’s Taxes. Evidently, the tax authorities exercise their powers with restraint. Also, a detailed code of conduct, initially inaugurated in 1984, exists.

In New Zealand, the Inland Revenue Department Act, 1974,210 gives the New Zealand tax authorities extensive powers to gather information. In New Zealand Stock Exchange v. Commissioner of Inland Revenue,211 the New Zealand revenue authorities required the stock exchange to produce a list of their largest clients and details of those clients’ purchases and sales of shares, and required a bank to produce the names and details of bank customers who had bought and sold commercial bills. These were general inquiries. They did not specify particular customers, nor was it alleged that there was any fraud or evasion. The court held that, by the plain wording of the statute, the tax authorities were entitled to the information.

In Portugal, there is no compulsory disclosure to the tax authorities. In South Korea, secrecy is lifted if the tax authorities request information under the tax laws.

In Spain, a tussle in the courts between the tax authorities and private citizens occurred in the 1980s. The citizen’s view that the tax authorities were not entitled to lift bank secrecy on the grounds that it was unconstitutional did not succeed.212 In Sweden, the tax authorities’ powers are so wide that it has been suggested that bank secrecy does not exist against them.

In Switzerland, there are distinctions between the federal, cantonal, and municipal tax jurisdictions. Generally, bank secrecy is often observed in relation to tax evasion. However, it is not observed in the case of serious tax fraud.213 Bank employees must testify in criminal proceedings regarding evasion of stamp duties, withholding taxes, turnover taxes, and customs duties.

In the United States, the Supreme Court has held that the tax authorities’ use of bank records to convict a defendant, among other things, of conspiring to defraud the government of tax revenues, pursuant to an allegedly defective subpoena duces tecum did not infringe the Fourth Amendment’s protections against unreasonable searches and seizures.214

International Cooperation

Internationally, exchanges of information between national fiscal authorities generally require a treaty. Many of these treaties now exist. The general rule still follows Lord Mansfield’s dictum in 1775, when he said that “no country ever takes notice of the revenue laws of another.”215

Practice varies enormously on the degree to which national fiscal authorities can override local bank secrecy at the request of a foreign fiscal authority. International judicial collisions regarding this issue have been common.

An English court resolved this issue in X AG v. A Bank216 by refusing to override local bank secrecy for a U.S. court proceeding. In this case, a U.S. grand jury subpoena, backed by a New York court order, ordered a U.S. bank to disclose all account documents at the London branch of the bank in respect of a Swiss company. The U.S. proceedings concerned alleged U.S. tax evasion. The court concluded that the U.S. order was, by English standards, excessive, and the London branch would not be permitted to breach English bank secrecy by disclosure.

A court in Hong Kong used a different solution to this problem by issuing an interlocutory injunction to avoid a breach of bank secrecy. In FDC Co. Ltd. v. The Chase Manhattan Bank NA217 the U.S. Internal Revenue Service was investigating the tax liability of Mr. Gucci and the Gucci company. A U.S. court issued a subpoena on the bank in the United States. The court in Hong Kong restrained the bank’s local branch from disclosing documents or information to comply with the U.S. subpoena by issuing an interlocutory injunction.

An English appellate court solved the same issue in R v. Grossman218 by refusing to order the English head office of Barclays Bank to produce documents of its customer maintained at the bank’s Isle of Man branch in connection with a tax investigation.

In two German decisions of the District Court of Kiel,219 the court held that compliance with local bank secrecy trumped compliance with subpoenas issued by a Michigan grand jury. The subpoenas ordered the branch of the bank in Kiel, which had a branch in New York, to produce customer documents. The order conflicted with German bank secrecy. The court enjoined the bank from divulging the documents. Subsequently, the U.S. authorities filed a proper request for judicial assistance through the competent German authorities. This request was successful.

Tax Treaties

The OECD Model Convention for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital, a leading model treaty, provides in Article 26 for the exchange of information to carry out the provisions of the Convention.220 Exchanged information has the same secrecy treatment that applies under the law of the receiving country, and can only be disclosed (broadly) to fiscal authorities, including enforcing courts. No contracting country need supply information that is, among other things, a commercial or professional secret. Bank secrecy is not specifically mentioned, but countries can, and do, protect bank secrecy. On the other hand, many treaties give greater powers to the tax authorities.

Extensive case law on these treaties exists. Thus, in 1986, a Hamburg court held that, as a result of the Germany-Australia treaty, a German bank must reveal details of clients’ accounts to the German tax authorities because these authorities were responding to a request from the Australian tax authorities. Bank confidentiality was not a “professional secret” within the treaty. In 1970, the Swiss Federal Court held that Swiss bank secrecy must be relaxed and information furnished under the Switzerland-United States Treaty if the Swiss tax authorities have a well-founded suspicion that a U.S. tax fraud has been committed. In 1981, five Florida banks were compelled by the U.S. Internal Revenue Service to produce information for Canada under a treaty, but a similar action in 1989 failed. In 1980, a Brussels court held that a Belgian company could sue for damages when the Belgian authorities improperly gave information to the Italian tax authorities on “secret” commissions paid to Italian residents, as a result of which the Italians reduced their purchases.

There are EC Directives on mutual assistance in the field of direct taxation221 and on value-added taxes (VAT).222 The EC Directive on mutual assistance in the field of direct taxation serves as an example. The recitals provide that tax evasion and tax avoidance across the frontiers of member states lead to budget losses and violations of the principle of fair taxation. These practices are liable to bring about distortions of capital movements, hence international measures are necessary to deal with this international problem.

Article 1 provides that “the competent authorities of the Member States shall exchange any information that may enable them to effect a correct assessment of taxes on income and capital.” Articles 2, 3, and 4 address the exchange of information by request and the automatic and spontaneous exchange of information. Pursuant to Article 2(2), “the competent authority of the requested Member State shall arrange for the conduct of any enquiries necessary to obtain [the requested] information.” It follows that if banks are domestically required to disclose information at the request of member states, that information may find its way to another member state. Member states, such as the United Kingdom, do provide for the provision of information by banks to the fiscal authorities.

Under Article 7, all information exchanged shall be kept secret in the receiving state in the same manner as information received under its domestic legislation. The standard is that of the receiving state, which may have standards that are more lax than the communicating state. However, there are safeguards in Article 7, which broadly requires that the information be made available only to the fiscal authorities or in connection with enforcing judicial or administrative proceedings. If a member state has narrower limits, then the communicating state can require the receiving state to respect the narrower limit. Communicating authorities, however, may allow information to be used for other purposes in the receiving state if this would be allowed under the laws of the communicating state. Communicating competent authorities can allow receiving competent authorities to pass the information to third-party countries.

However, a general override in Article 8 may respect banking secrecy. An authority need not carry out enquiries or provide information if those activities would be prevented by its legal regime in relation to itself. Moreover, Article 8 provides that “information may be refused where it would lead to the disclosure of a commercial, industrial, or professional secret or of a commercial process, or of information whose disclosure would be contrary to public policy.” This language is similar to the OECD model tax treaty where there is case law that “professional secret” does not necessarily include bankers secrecy.223 Finally, under Article 8, an authority can “refuse to provide information where [a receiving state] is unable, for practical or legal reasons, to provide similar information”; in other words, where no reciprocity between states exists.

In implementing the EC Directive’s provisions for the exchange of tax information, the tax authorities in Greece are not permitted to provide assistance and information on bank deposits to the tax authorities in other member states.

Luxembourg has many double taxation treaties but will not divulge information covered by Luxembourg banking secrecy under these treaties. Under Article 8 of the EC Directive on mutual assistance in the field of direct taxation,224 a member state may refuse to seek information on behalf of another member state’s authority if its domestic authorities would not seek the same information under their usual practice. Luxembourg has always used this provision to refuse exchanges.

In Switzerland, there can be no legal assistance involving fiscal information if there is no treaty. The treaties with France, Germany, Denmark, Great Britain, and the United States protect bank secrecy. Serious tax frauds, however, may permit mutual assistance under the Swiss Legal Assistance Act of 1981.225

Tax Havens

Tax havens are countries with zero or low taxes. Some of these havens have special legislation permitting the establishment of local business companies and trusts that are not permitted to carry on business locally, but these companies and trusts maintain secrecy by avoiding public disclosure of financial statements. These tax havens are mainly small economies. Other countries grant special exemptions to encourage investment.

Commonly, individuals and businesses seek to place their assets in these countries to escape high taxes in their own countries. Tax avoidance legislation seeks to counter this practice by taxing income earned abroad, such as royalties and patents (even though not repatriated), and attacking transfer pricing.226 Often the use of tax havens is perfectly legitimate. For example, certain offshore investment companies and trusts, captive insurance companies, and employment companies, especially in shipping, represent legitimate uses of tax havens. In other cases, tax havens have been used improperly to evade taxes. The “respectable” tax havens have been diligent to preserve their reputations.

Tax haven countries must be politically stable, free of an inclination to expropriate, and free from exchange controls. These factors are not considered by potential customers to be satisfied in the case of numerous countries that might otherwise qualify, so the list of widely used tax havens is not large. Some widely used tax havens are the British Virgin Islands, the Cayman Islands, Gibraltar, Grenada, the Isle of Man, and Jersey.

The British Virgin Islands is a U.K. territory with limited internal legislative powers. The common law of England applies. Accordingly, the English rules of banking secrecy are in force, except as modified by statute. Thus, the Tournier rules apply.227 There is a local equivalent of the U.K. Bankers’ Books Evidence Act.228 The Evidence (Proceedings in Foreign Jurisdictions) Act of 1988229 is similar to the U.K. legislation in giving effect to the principles of the 1970 Hague Convention.230 The Drug Trafficking Offences Act, 1992,231 is based on the United Kingdom’s 1986 Act. The Mutual Legal Assistance (United States of America) Act232 provides for mutual assistance under the treaty in relation to specific crimes, including racketeering, drug trafficking, insider trading, and fraudulent securities practices. Bank secrecy is overridden in relation to the crimes concerned, including investigations, but requesting parties must not use any information obtained under the treaty for any purposes other than the investigation, prosecution, or suppression of the crimes concerned without the prior consent of the requested party.

In the Cayman Islands (a British dependent territory in the Caribbean and a major international financial center with hundreds of banks), the Tournier case applies.233 This is backed up by the Confidential Relationships (Preservation) Law, 1976,234 which makes a breach of secrecy a criminal offense subject to exceptions.235 The Cayman Islands also has the Mutual Legal Assistance Treaty of 1986 with the United States, through the United Kingdom, covering certain criminal matters but specifically excluding tax matters and tax enquiries.236

Gibraltar is a U.K. dependent territory and a dependent territory of the European Union under Article 227(4) of the Treaty of Rome. EC banking and other directives apply, but the VAT Directive and certain others do not.237

In Grenada, which gained its independence in 1974, Tournier applies,238 as well as the Evidence Act (based on the British Bankers’ Books Evidence Act, 1879), the Bankruptcy Act (based on the British Bankruptcy Act, 1883), and the International Companies Act (based on the British 1908 version).239 Tax authorities have wide powers. United States-Grenada (Taxes Exchange of Information) Act, 1987, provides for mutual assistance in tax matters.240 The Banking Act, 1988, contains the usual disclosure powers.241 The International Companies Act, 1989, provides for the complete secrecy of offshore companies, except for court disclosure orders relative to the investigation of Grenadian crimes or by other court orders, or under the U.S. treaty.242

In the Isle of Man, a U.K. Crown dependency, the EC directives on financial institutions do not apply. Tournier243 probably applies, as well as the Bankers’ Books Evidence Act, 1935, on English lines, and the Banking Act, 1975, which allows exchange of supervisory information with foreign authorities, but not tax authorities.244

On the other hand, Jersey is a U.K. Crown dependency that is not strictly a tax haven. It is not a member of the European Union, but certain Treaty of Rome provisions apply. EC tax and financial institution directives do not apply; Tournier applies.245 The following acts are on British lines: Bankers’ Books Evidence (Jersey) Law, 1986; Drug Trafficking Offences (Jersey) Law, 1988; Investigation of Fraud (Jersey) Law, 1991; Evidence (Proceedings in Other Jurisdictions) (Jersey) Order, 1983; Company Securities (Insider Dealing) Law, 1988; Banking Business (Jersey) Law, 1991, and the Code on Money Laundering, which is patterned on the 1988 Basle Statement of Principles.246 These laws provide fairly wide powers in favor of tax authorities.

Disclosure in Civil Litigation

Domestic Civil Litigation

Civil litigation requires opposing parties to disclose their evidence to the other before the trial so that a party is not ambushed. Parties must cooperate in the search for the truth. However, court rules often prevent fishing expeditions, harassment, and oppressive or irrelevant disclosure.

Pretrial Discovery

As regards pretrial discovery, the main categories are (i) countries that allow wide pretrial discovery, (ii) countries that compel a degree of pretrial discovery but do not permit fishing expeditions and are otherwise restrictive, (iii) countries that do not allow pretrial discovery, and (iv) countries that have not addressed the issue.

The United States fits into the first category. It allows wide pretrial discovery, including the asking of questions on any matter relevant to the subject matter involved in the pending action, and it is not ground for objection that the information sought will be inadmissible at the trial if this information seems reasonably calculated to lead to the discovery of admissible evidence.247 The difference between English and U.S. procedures was discussed in Radio Corp. of America v. Rauland Corp.248 and recognized by the U.S. Supreme Court in Société Nationale Industrielle Aérospatiale and Société de Construction d’Avions de Tourisme v. U.S. District Court for Southern District of Iowa.249 “It is well known that the scope of American discovery is often significantly broader than is permitted in other jurisdictions ….”250 It is not necessary to know of the existence of documents in advance. The rules allow the discovery of anything that is not privileged and that may lead to the discovery of admissible evidence. A general description will suffice, subject to protections for discovery that is inappropriate or abusive.

The English-based common law countries fit into the second category. These countries compel a degree of pretrial discovery but do not permit fishing expeditions and otherwise are restrictive. This approach, however, applies only between the parties. Banks are not usually subjected to pretrial discovery in litigation in which they are not a party.

Most developed civil law jurisdictions, such as Germany, France, and the Netherlands, fall into the third category. These countries do not allow pretrial discovery. They object to the burden of disclosing vast numbers of documents, many of which are irrelevant, in order to find evidence. Indirect pressure to produce evidence exists, because the court may draw adverse conclusions if a party fails to produce.

The fourth category consists of countries that do not have highly developed court procedural rules. These jurisdictions do not have an opinion on pretrial discovery.

English-Influenced Jurisdictions

The position in England is illustrative of the position in many English-influenced countries. First, pretrial discovery is permitted only between the litigants, who must produce all documents in their possession, custody, or power that are relevant to the issues. Third parties, such as banks, are mere witnesses. They can be compelled by subpoena to testify in court, but discovery is not available against them because they are not party to the dispute and should not be subjected to burdensome involvement in disputes between others. There are exceptions—especially where the discovery is necessary to trace assets spirited away by fraud or mistakenly paid away.251 Second, by virtue of Section 7 of the Bankers’ Books Evidence Act, 1879, banks can be compelled by subpoena to testify and produce documents, but only in the actual proceedings. There are procedures whereby a copy of a banker’s books is admissible in evidence.252 This rule of convenience allows banks to avoid attending court.

The Bankers’ Books Evidence Act is adopted in numerous English-based countries, including the Caribbean islands, such as the British Virgin Islands.253 Singapore also has a version of the Bankers’ Books Evidence Act.254

As previously mentioned, disclosure is usually available only as regards the bank of the other party to the proceedings, not third parties, unless, for example, the third party’s account in reality contains money of the defendant or shows the location of his assets.255

Banks must also comply with court subpoenas in the same way as any other witness, but the court will require that the bank supply relevant evidence to satisfy the subpoena.256 In the Irish case of Staunton v. Counihan,257 a guarantor guaranteed the debt of a company and executed a charge on property to secure the guarantee. Following a claim on the guarantee by the creditor, the guarantor alleged that no debt was due by the company as principal debtor. The creditor sought to take copies of all entries in the bank account of the debtor company at the time of the execution of the charge. The court held that the debtor company was not a party to the proceedings, and so great caution was required in calling for inspection under Section 7 of the Bankers’ Books Evidence Act, 1879.258 The creditor’s claim did not essentially depend upon the entries in the bank account of the company and must be proved by other means. The lifting of the company’s bank secrecy was refused. Similarly, in Australia, excessive subpoenas are treated as a serious abuse of the process of the court.259

In England, it has been held that a bank might sometimes be obliged to inform a customer of the receipt of a subpoena, but a bank need not do more than use its best endeavors to inform the customer if the bank is ordered to produce details of the customer’s account in court. In Robertson v. Canadian Imperial Bank of Commerce,260 a lender claimed that he had made a loan to a borrower who wanted to pay off a debt to his brother. So the lender gave the borrower a check in favor of the brother. The borrower denied receiving the loan. The lawyer got an order for the discovery of the brother’s bank statements. The bank tried to contact the brother but failed and so produced the bank statements in court. These statements revealed the amount of the loan. They also revealed that the brother had an overdraft, which, he claimed, wounded his feelings and injured his credit. This revelation was irrelevant to the proceedings. The court concluded that the brother had no claim. The bank had been ordered by the court to produce the statements. At most, the bank had an obligation to use best endeavors to inform the customer of the subpoena. In any event, the brother had suffered no loss.

In New Zealand, the courts are similarly reluctant to order the production of banking records of a person who is not a party to the litigation. In Allingham v. Bank of New Zealand,261 the customer alleged that the bank had closed out foreign exchange contracts at a time that was disadvantageous to the customer. The customer wished to show that the bank had pursued a deliberate policy of prejudicing smaller clients by closing out their contracts at different times in order to protect the interests of larger clients. The customer, therefore, sought discovery of bank documents that would reveal the identity of other customers who had allegedly suffered similar losses and the extent of those losses. The court held that the customer was not entitled to information about the names, transactions, or losses of other customers.

Other Country Examples

In Denmark, the procedural code provides that the court can determine that a witness shall be excluded with regard to facts that they should treat as confidential where confidentiality is important. However, in one case in 1979 a court ruled that a creditor should not be barred from obtaining information from employees in a bank regarding a debtor’s assets at the bank.262

In Germany, a “business secrets privilege” exempts a witness from disclosing information that would constitute the divulgence of a business secret—an all-embracing concept. The German courts will not accept protective orders whereby the parties to whom the disclosure is made will keep the information confidential. The exemption for confidential information is to be found in Paragraphs 383 and 384 of the Code of Civil Procedure. This view is strongly held in relation to other areas of German law. For example, banks can refuse to testify in insolvency, labor court, and social court proceedings, as well as administrative court proceedings, if the information is confidential.

In France, it appears that the banking secrecy law set out in Article 57 of the Banking Law of 1984263 overrides provisions of the new Code of Civil Procedure providing for compulsory disclosure.

Luxembourg is also one of the few countries that has not overridden bank secrecy in the case of civil litigation. The Supreme Court of Luxembourg has decided on several occasions that any person required to observe professional secrecy under Article 458 of the Penal Code may disclose confidential information when he is required to testify, but the court may not oblige him to disclose.264

In Mexico, Article 117 of the Credit Institutions Law of 1991 states that bank secrecy can be overridden where the information has been requested by a court of law pursuant to a ruling issued in a legal action where the holder of title is either plaintiff or defendant.

In the Netherlands, bankers must give testimony in civil proceedings, but they can testify only as to facts known to them from their own observation. No obligation to produce documents or other records exists. Only the actual litigating parties have to produce documents. In Portugal, bank secrecy cannot be overridden by mandatory testimony by a third-party bank in civil proceedings.265

In Singapore, civil proceedings can be held in camera so as to preserve bank secrecy.266 In South Korea, Article 318 of the Civil Procedure Code permits disclosure of confidential information if necessary for evidentiary purposes.

In Spain, Article 603 of the Civil Procedural Law provides that a judge can require documents from a person who is not a party to the proceedings, provided this is requested by one of the parties to the proceedings, and the court decides that the documents are relevant to the decision.267 In Sweden, bank officers can be required to testify in court, but there is a provision in the Code of Judicial Procedure of 1948 that allows a witness to refrain from giving testimony if this would involve disclosure of a “trade secret,” unless there is extraordinary cause.

In Switzerland, the obligation to testify in civil proceedings depends on the law of the canton. Eight of the cantons exempt all persons bound by bank secrecy from the duty to testify. In another eight, bank employees are obliged to testify. In the remaining seven, including Zurich, and probably Lucerne, the court decides in each case whether the bank employee must testify. This compromise solution is followed by the Federal Code of Civil Procedure. There are special protective measures to ensure that secrecy is breached only to the strictest necessary extent.

Attachments

In many countries, litigants can obtain a prejudgment attachment or injunction to prevent removal of assets from the jurisdiction to evade a judgment. Examples of these prejudgment attachments or injunctions include the Mareva injunction in English-based countries, the prejudgment attachment in the United States, the saisie conservatoire or saisiearrêt in French-based jurisdictions, and the equivalent in other Franco-Latin countries, for example, the Spanish embargo preventivo, and the arrest in Germanic countries. In order not to alert the defendant, the order is made without the presence of the opponent. Those obtaining an order are responsible for costs if they lose. In addition, court orders are available in all jurisdictions to attach a debtor’s assets once judgment is returned in the adversary’s favor.

In the case of both prejudgment and post judgment attachments, a common procedure is that a third-party debtor, such as a bank, owing money to the judgment debtor must disclose details of the amount that the third-party debtor owes when he or she receives the court order of attachment.

In England, a bank receiving a Mareva injunction (and probably even if it has merely heard of it) is in contempt of court if it allows a money transfer in breach of the order. Plaintiffs are responsible for the bank’s costs and can ask banks to make searches in all of their branches on payment of the bank’s costs. However, the bank does not disclose to the plaintiff whether or not it has an account; rather, the bank merely freezes it. It is for the court to order the defendant to make discovery.

English guidelines for the bank’s duty on receiving a court sequestration order against a customer were laid down in Eckman v. Midland Bank Ltd.268 In the Irish case of Larkins v. National Union of Mine Workers,269 sequestrators had been appointed by an English court to enforce a contempt of court fine against a labor union. The union claimed that officials of the union had, in defiance of the English court, endeavored to transfer funds out of England into Ireland to escape the English court fine and thereby placed the union’s funds in jeopardy. The court ordered the union and the Irish bank allegedly holding the funds not to deal with the funds or dispose of them. Irish banks within the jurisdiction were ordered to produce bank accounts of the union with Irish financial institutions. The injunction was in effect a Mareva injunction to prevent removal of the funds from the Irish jurisdiction until the judgment determined the owner of the funds.

In Belgium, a bank must disclose account details in response to a saisiearrêt conservatoire or a saisiearrêt exécution. In France, the effect of legislation introduced in 1991270 seems to be that the public prosecutor can, at the request of a court bailiff, ask banks where accounts are held. Once an attachment is served, the bank is obliged to declare the balance of the debtor’s account as at the date of the attachment. In Germany, Paragraph 840 of the Code of Civil Procedure grants an execution creditor the right to demand information from a third-party debtor (garnishee) of the judgment debtor and the garnishee must provide the information. This provision applies to banks and overrides banking secrecy.

Greece is exceptional. Notwithstanding the general rule in the Code of Civil Procedure that, in the case of interim or compulsory attachment of a debtor’s funds, the third party allegedly owing money to the debtor must notify the court whether he owes money to the debtor or not. It was held that the 1971 secrecy law prohibits Greek banks from making this declaration to the court.271 This holding only applies to money deposits and not to shares, debentures, or other negotiable instruments deposited with a bank.272 The same applies to deposits held by foreign banks in Greece.273 The court said that the object of the secrecy legislation was to increase money deposits with banks so that savings available to finance the national economy could be increased. A 1992 law, however, introduced a limited lifting of banking secrecy in relation to deposits and a right of attachment in case of tax evasion.274

The Netherlands follows the usual practice by requiring that banks receiving an attachment order must state what assets of the customer are deposited with it and the deposits that the bank owes to the customer. In Sweden, banks must give information to enforcement authorities in order to enable them to ascertain whether a particular debtor’s assets can be attached.

Tracing Assets

Tracing is the right of a person who has been wrongfully dispossessed of an asset either by fraud or some lesser wrong (such as money taken in conflict of interest or money paid by mistake) to follow the asset and its proceeds through its various transformations. The holder of the money, which may be the benefit of a bank account, is known in common law countries as a constructive trustee. This trustee holds the money for the true owner in spite of his own insolvency. Most civil law countries do not follow this principle. In these countries, the proprietary claim of the true owner does not survive the holder’s bankruptcy, and the true owner can only claim as an unsecured creditor. In these situations, banks are not a party to the litigation, because, typically, the real wrongdoers have not been identified or have disappeared.

Notwithstanding the general principle that third parties should not be subjected to discovery orders, it has been held in England that discovery can be ordered when the third party has become involved in some way and where this is the only method of discovering the wrongdoer.275 The court, therefore, can order a bank to disclose the account of a customer to help the true owner trace his money. The jurisdiction is exercised cautiously. In Bankers Trust Co. v. Shapira,276 a bank in New York debited a Saudi customer’s account against a forged order and credited the amount to a London bank as instructed by the forgers. The U.S. bank had to restore the money to the Saudi account. The court decided that the U.S. bank should be permitted to inspect correspondence between “the rogues” and the Swiss bank that was held by the London bank. The U.S. bank could only use the information to trace the funds.277

In England, the police may also apply for orders to detain bank accounts comprising the proceeds of a crime if the amount concerned can be clearly identified.278 In Mohammed Omar v. Omar,279 the question was whether information provided by a bank pursuant to a court order granted in relation to a tracing claim could be used for another purpose. This purpose was the pursuit of additional personal claims against the defendants in other jurisdictions, because the evidence apparently produced evidence of other claims. The court allowed the use of the information for other claims.

International Civil Litigation

The taking of evidence abroad is considered by most countries to be in excess of sovereignty and requires the permission of the receiving country. In the nineteenth century and before, foreign protests were aroused by the habit of the English courts of appointing examiners to examine witnesses in foreign countries. In 1895, a prominent English barrister was arrested and imprisoned in Germany for taking evidence from a witness in Wiesbaden. The German authorities considered this action a contempt of court. The Australian courts too have held that the taking of evidence internally, other than through the proper channels, can be a contempt of court.280 Multilateral cooperation is achieved by international multilateral conventions involving letters of request,281 bilateral conventions,282 examination under the supervision of the requesting country’s consular authorities,283 and national rules whereby the national courts will provide assistance in an appropriate case, even without a treaty, in the interests of international comity.284 Moreover, English courts have allowed video-conference evidence of a witness in New York.

Country Examples

In England, the courts will provide assistance in civil and commercial matters in a manner that is wider than the 1970 Hague Convention,285 but direct foreign revenue and penal claims are excluded.286 The provisions of the Evidence (Proceedings in Other Jurisdictions) Act, 1975, also apply to foreign criminal proceedings, subject to limitations. The evidence requested must not be wider than that available in the country of origin or in the United Kingdom. Fishing expeditions are not permitted and orders are discretionary. The Act is locally enacted in numerous British dependent territories. There is similar legislation in Australia with uniform state laws. The English approach discourages fishing expeditions.287

The following cases demonstrate that English courts are reluctant to infringe upon the bank secrecy of banks abroad. In MacKinnon v. Donaldson Lufkin and Jenrette Securities Corp.,288 the court refused a discovery order against the London branch of a U.S. bank in relation to accounts at its New York head office in a civil action alleging international fraud. In Re ABC Ltd.,289 the Cayman Islands court refused to allow a Cayman Islands bank to disclose information ordered by a U.S. court even though the customer had signed a consent. The court said that the consent was signed by order of the U.S. court so, in substance, it was not a free consent but a direction of a foreign court. The decision was affected by the Cayman Islands Confidential Relations (Preservation) Law of 1976.

In El Jawhary v. BCCI SA,290 customers of a bank in liquidation obtained injunctions restraining the liquidator from disclosing information by claiming that disclosure would be in breach of the bankers’ duty of secrecy. The bank was part of a larger group being wound up in several countries amid allegations of fraud. The customers were fearful that the information would be leaked to other jurisdictions. The injunctions were granted. The liquidators applied for a variation of the injunction, stating that the liquidator should be able to disclose where the interests of the bank required disclosure, as would be the case with one of the exceptions to Tournier.291 The court held that the variation should be granted. However, in using this exception to Tournier, the liquidators should err on the side of caution, especially in disclosing information to insolvency administrators in other jurisdictions. The court would not determine what disclosures could be made in this action. If the liquidators did disclose, there was no obligation to inform the customers.

In the Irish case of Chemical Bank v. Peter McCormack, Chemical Bank alleged a fraud of about $800,000 and alleged that the money had been transferred by the defendant to his personal account with the New York branch of an Irish bank.292 Chemical Bank applied for an order in Ireland declaring that the Irish bank should disclose account entries at its New York branch. The Irish court stated that it did not have power to order inspection in a foreign country, and hence inspection at the New York branch was in excess of jurisdiction. Disclosure of the U.S. accounts, however, was necessary and relevant as evidence. A request, therefore, could be issued to the appropriate U.S. court to assist the Irish court in obtaining the required information. Chemical Bank was permitted to apply to the U.S. court.

Many countries in the British Commonwealth have similar attitudes, stemming from imperial legislation providing for comity in judicial letters of request addressed to the appropriate authorities in foreign countries. In Argentina, cooperation occurs under Article 132 of the National Procedural Civil and Commercial Code.

In Canada, where statutes are either federal or provincial,293 pretrial discovery is allowed, and it may be permitted pursuant to foreign letters of request. In Frischke v. Royal Bank of Canada, the Ontario Court of Appeal refused to compel the Royal Bank of Canada to disclose information by obtaining the information from their Panama branch, contrary to Panamanian secrecy laws.294 In Compalex Resources International v. Schaffhauser Kantonalbank, an Ontario court compelled a representative of a Swiss bank to produce documents and answer questions concerning the bank’s customers in a civil action in Ontario, even though this was confidential information under Swiss law. Disclosing this information subjected the bank and its representatives to criminal and civil sanctions under Swiss law.295 There were complex subsequent proceedings in this case.

In France, Sections 733-748 of the new Code of Civil Procedure require reciprocity. In Japan, the Law Relating to the Reciprocal Judicial Aid To Be Given at the Request of Foreign Courts296 requires reciprocity and covers both civil and criminal cases. In the United States, the procedure is governed by federal or state procedural statutes and the 1970 Hague Convention. Apart from the Convention, the main federal rule is discretionary.297

Multilateral Conventions

There are three main Hague Conventions on civil procedure—1905, 1954, and 1970.298 Both the 1954 and 1970 Conventions replaced the letter-of-request procedure of the earlier Convention, but the earlier Convention may still be in force between the various contracting parties. A country may have accepted obligations under the 1954 Convention to one group of countries, as well as obligations under the 1970 Convention toward another group of countries.

The Hague Convention of 1970 and the Inter-American Convention of 1975299 contain exclusions that permit contracting countries to refuse evidence or discovery that contravenes local secrecy. The Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters, 1970, provides that a judicial authority may request a competent authority in another contracting country, by means of a letter of request, to obtain evidence, including discovery of documents. Under Article 1, the request may only be used for evidence intended for judicial proceedings, commenced or contemplated. The executing authority applies its own procedures, under Article 9. Article 11 allows the person concerned to refuse to give evidence if, among other things, he can refuse under the law of the country of execution or origin. Under Article 12, execution may be refused if the country addressed considers that its sovereignty or security would be prejudiced thereby. Contracting countries can exclude pretrial discovery of documents under Article 23. Most of the signatories have done so, including the United Kingdom but excluding the United States.300

Switzerland is a signatory to the 1905 Hague Convention, as amended in 1954. In practice, national law takes precedence over the provisions of the Convention. Therefore, in Switzerland the success of a mutual assistance application under the Convention will depend upon the applicable cantonal law. A negative response would arise if the banker must testify in Geneva, while the same bank could be compelled to testify in Basle. Switzerland also has a number of bilateral treaties and may render mutual assistance on the basis of reciprocity in the absence of a treaty, provided there are no compulsory measures.

The Inter-American Convention on Letters Rogatory of 1975 (with Protocol of 1979) provides for certain formal procedural acts and for the taking of evidence abroad, subject to reservations, by letters rogatory in connection with proceedings in civil and commercial matters.301 It does not apply to acts involving measures of compulsion.302 Execution is in accordance with the law of the country of destination303 and must not be contrary to local public policy.304

Arbitration

In some cases, the court may send or receive requests for evidence at the request of an arbitral tribunal in civil and commercial matters, for example, in England and related countries. The jurisdiction is often unclear, but in any event the intrusion on bank secrecy will never be greater than that available in court proceedings.

In Switzerland, arbitrators are not entitled to compel testimony. Article 184 of the Statute on Private International Law, however, provides that the courts may order access, including to bank information, at the request of the arbitral tribunal.

Disclosure in Insolvency Proceedings

Domestic Insolvency Proceedings

Insolvency may cause a breach of bank secrecy in two main situations. Either the bank itself is insolvent, or the insolvent has a bank account. In both situations, the insolvency administrator requires information in order to enable him, for example, to ascertain and collect the assets or determine any wrongdoing and report it to the authorities. This determination of wrongdoing pertains to any action for which directors must bear personal liability. Wrongful or fraudulent trading, such as incurring credit when the company is insolvent, provides an example of a situation in which a director would face personal liability. This determination of wrongdoing should also ascertain if there have been any preferences (payments or transfers that should be avoided and the property restored). Although an insolvency administrator is the successor to the business, his position leads to greater disclosure because of the reports to creditors and authorities.

In the case of bank insolvencies, a special legal regime may apply in order to safeguard depositors and the banking system. This is the case in the United States. More commonly, the ordinary corporate insolvency rules apply, with enlarged powers being granted to the banking authorities who may, for example, be entitled to initiate themselves an insolvency proceeding, as in Britain. The extent to which banking supervisors can, in the case of insolvency proceedings involving a bank, continue to use their enhanced powers to command information is a matter for detailed investigation.

As to ordinary corporations, in Britain, Section 236 of the Insolvency Act, 1986, provides that the court can order production of information in relation to a company in an insolvency proceeding. The court may, on the application of the insolvency representative, summon to appear any person “whom the court thinks capable of giving information concerning the business, dealings, affairs or property of the company.”305 This standard provides considerable discretion. The procedure is inquisitorial. Accordingly, the courts will guard against oppressive investigative orders. The insolvency administrator is, of course, allowed access to the insolvent’s bank account information, but the courts are reluctant to compel disclosure of third-party accounts.306

Canadian bankruptcy legislation has similar provisions for disclosure in favor of an insolvency administrator. In Royal Bank v. Oliver,307 a bank creditor of two insolvents was successful in obtaining a court order permitting the questioning of the bankrupts’ wives and requiring the production of banking and investment records of other financial institutions.

Canadian cases have also developed the disclosure rules where the bank is itself insolvent. In Canada Deposit Insurance Corp. v. Canadian Commercial Bank,308 the bank was in liquidation and the Canadian Deposit Insurance Corporation (CDIC) paid out more than $1 billion to depositors. The CDIC took legal action against former officers of the bank and required documents in the possession of the liquidator on the grounds of the public interest. The court held that, on the basis of Tournier, the CDIC was entitled to the information on the grounds of an overriding public interest. In Surrey Credit Union v. Willson,309 there was an application to have information in the hands of a liquidator of a failed bank disclosed in civil proceedings against the bank directors and others. The court allowed the production of the documents in view of provincial subpoena laws and rules of court.

In France, insolvency proceedings are largely court driven. A 1984 law310 gives the President of the Court the power to obtain information from banking institutions that is necessary to assess the debtor’s situation. Under the Bankruptcy Law of 1985,311 the insolvency administrator can obtain information for the purposes of drawing up a rehabilitation plan, and bank secrecy cannot be invoked against the insolvency representative who acts as a legal representative of the bank’s customer. By virtue of Article 184 of the Bankruptcy Law of January 25, 1985,312 when sanctions are imposed against directors of a corporate body subject to insolvency proceedings, the court can lift bank secrecy to assess the totality of the directors’ wealth. Director liability for the debts of the company is a serious risk in France.

In Greece, bankruptcy trustees can access the bankrupt’s account.313 In Luxembourg, Article 485 of the Commercial Code allows the judge-commissioner to compel the bankrupt or any other persons to verify balance sheets and to investigate the reasons and circumstances of the bankruptcy. Bank secrecy is overridden as regards the bankrupt.

In Switzerland, the trustee in bankruptcy is entitled to full disclosure of account information pertaining to the bankrupt’s client accounts. This principle also applies in the bankruptcy of a bank. Creditors, through the insolvency representative, may have wide access to client-related information if necessary to protect their interests, subject to special safeguards in the Federal Law on Banks and Savings Banks of 1934.314

International Insolvencies

As for international bankruptcies, most legally developed countries require the insolvency administrator to collect the global assets. Therefore, global discovery is required. Also, discovery is required if there is suspected wrongdoing.

Insolvency recognition is a large subject. Discovery is also not a minor subject. The international trend is to recognize the insolvency proceedings of the main forum, sometimes automatically (for most English-based countries), sometime by way of a recognition order (the Franco-Latin exequatur), sometimes by way of treaty, and sometimes by way of special rules for ancillary proceedings.315

Recognition usually covers the freeze on enforcement actions and the right to collect the assets. It is not generally a recognition of the insolvency laws of the home country as a whole. Discovery is available in the United States through Section 304 proceedings,316 but the English approach is more restrictive.317 Conversely, the English courts do not treat their own wide discovery powers in Section 236 of the Insolvency Act, 1986, as having extraterritorial effect.318

In Switzerland, if there is a Swiss ancillary liquidation under the Private International Law Statute of 1987, only the Swiss insolvency representative has the right to obtain information from the bank. If there is no international treaty and no ancillary bankruptcy proceeding in Switzerland, the better view is that a foreign bankruptcy receiver is entitled to lift bank secrecy on the ground that he is the representative of the corporation. If this were not the case, then nobody could represent the corporation in liquidation. There is a bilateral bankruptcy treaty between France and Switzerland of 1869 that, according to the Swiss Federal Court, obliges Swiss banks to give information to the French trustee in bankruptcy.

The alternative is for the liquidator to arrange for a creditor to commence a full bankruptcy proceeding in the foreign jurisdiction in order to attract the foreign bankruptcy discovery rules.

Miscellaneous Examples of Disclosure

Exchange Controls and Trade Laws

The diminishing number of countries that have exchange controls habitually call banks to police the rules. It is thought that international mutual assistance in exchange control enforcement leading to a piercing of foreign bank secrecy is negligible. Article VIII, Section 2(b) of the International Monetary Fund’s Articles of Agreement attempted to secure a degree of international recognition by the courts of IMF members concerning the exchange controls of an IMF member that are maintained or imposed consistently with the Fund’s Articles.

Customs and trade laws that, for example, prohibit imports or impose tariffs have also received little international cooperation in the field.

Antitrust Laws

Antitrust legislation seeks to encourage competition by controlling monopolies and restrictive practices, such as price fixing. The legislation commonly allows the authorities to override bank secrecy in connection with antitrust investigations. An example is Section 155 of the Australian Trade Practices Act (Commonwealth), 1974. International mutual assistance is highly controversial and, as mentioned, has been the subject of numerous blocking statutes.

Embargoes and Freezes

Typically, freezes under “trading-with-the-enemy” legislation involve a piercing of bank secrecy. International cooperation generally requires the consent of countries. This consent can be established either by treaty or harmonizing statute.

Public Registration Systems for Security Interests

Public registration systems for security interests lead to a lifting of bank secrecy in relation to secured transactions appearing on the register. Examples are land, ship, and aircraft registers, the filing system for personal property security interests in the United States319 and some Canadian provinces,320 and the corresponding system of registration of corporate charges at the Companies Registry in most English-based systems. Public registration of security interests over personal property is not widely adopted in Austria, Germany, the Netherlands, and Switzerland. In Franco-Latin countries, nonpossessory security over personal property is very limited in any event. Generally, the creditor must have a possessory pledge, but there are many exceptions.

Bank Mergers

Bank mergers lead to disclosure. This usually follows without difficulty if there is a universal succession to assets and liabilities of a business. Express confidentiality contracts may cause problems. The question does not arise if the merger is by an acquisition of the shares of a bank, as opposed to a fusion.

Heirs

When a customer dies, the probate courts or administrators will require information to ascertain the deceased’s assets. There may be limitations on the rights of creditors and beneficiaries to information in some jurisdictions, especially information about the deceased’s past bank transactions. The heirs are interested in present assets, not past dealings, which, it is thought, should be allowed to accompany the deceased to the grave. In Switzerland, heirs, but not legatees, are entitled to information as successors, except for “highly personal rights” that usually will not include bank information. Swiss banks, on the other hand, tend only to disclose information regarding the country of the assets at the time of the death. In Greece, heirs are entitled to lift bank secrecy because they are successors, although this is not necessarily so in relation to joint accounts in which a deceased was a holder. Luxembourg appears to have a similar view to Switzerland. Heirs are entitled to information about the assets of the deceased. The deceased has a right to protection of his private life. Consequently, his heirs cannot obtain information relating to transactions made by the deceased before his death.

Spouses

Husband and wife may have disclosure rights in respect of each other’s bank dealings, particularly in countries adopting community of matrimonial property. This may be no more than a reflection of the rights of joint-account holders. In France, a surviving spouse can override the banking secrecy owed to the other spouse in order to liquidate the community. In Switzerland, spouses agreeing to a joint-property regime have equal rights to bank information, but otherwise each spouse has individual bank secrecy.

Apart from this and apart from joint accounts, banks must observe bank secrecy toward each spouse separately in Denmark, England, France, Greece, Norway, and Sweden. There may be special court discovery powers in relation to divorces so as to enable the unhappy spouses to verify the financial situation of each other. In France, in the case of divorce, a judge can carry out all the necessary inquiries in relation to financial provision for spouses without their being able to invoke secrecy.321

Joint Accounts

A single joint-account holder can usually release the bank from a secrecy obligation toward third parties so as to override the other joint-account holder. Sometimes a bank can be authorized to release only information relating to the joint-account holder concerned, but the matter should be investigated in detail. In Switzerland, joint-account holders are entitled to comprehensive information on the joint account.

Partnerships and Companies

Generally, partners have a separate right to banking information because they all have unlimited liability and (often) duties of the utmost disclosure to each other. This is probably true of shareholders in various forms of private companies who are personally liable to third parties. French courts have upheld this proposition. However, shareholders are not entitled to direct information about the corporate bank account as a universal proposition. Shareholders must obtain information from the company, and their right to information is governed by company law.322

Miscellaneous

Other examples of disclosure in Britain are contained in legislation relating to consumer protection, mental incapacity, regulation and disciplining of solicitors, and investigation of charities. Greece has an unusual provision for lifting bank secrecy in relation to the financial resources of politicians, the directors of public sector corporations, media editors and managers, the shareholders of 5 percent of any Greek bank and holders of 10 percent of media companies and their relatives.323

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